Resource Materials - Canadian Centre for the Study of Co ...

NEW GENERATION CO-OPERATIVES

Resource Materia lsFOR BUSINESS DEVELOPMENT PROFESSIONALS

AND AGRICULTURAL PRODUCERS

Centre for the Study of Co-operativesUniversity of Saskatchewan

Copyright © 2001 Individual Authors of the Chapters Contained Herein Materials contained in this binder may be reproduced freely provided it is not done for commercial gain. The Canadian Co- operative Association, the Conseil Canadien de la Coopération, and the Centre for the Study of Co-operatives will not be held liable for any errors that may occur in the copying or transcription of this material. Edited by Donald Ward, Ward Fitzgerald Editorial Design, and Nora Russell, Centre for the Study of Co-operatives Interior layout and design by Nora Russell Printed in Canada For further information about the materials in this binder please contact: The Canadian Co-operative Association 275 Bank Street, Suite 400 Ottawa ON K2P 2L6 Phone: (613) 238–6711 / Fax: (613) 567–0658 Web Site: http://www.coopcca.com or Centre for the Study of Co-operatives 101 Diefenbaker Place University of Saskatchewan Saskatoon SK S7N 5B8 Phone: (306) 966–8509 / Fax: (306) 966–8517 E-mail: [email protected] / Web Site: http://coop-studies.usask.ca

C o n t e n t s

1 N e w G e n e r a t i o n C o - o p e r a t i v e s : A n I n t r o d u c t i o n B r e n d a S t e f a n s o n

2 W h y N G C s ? M u r r a y F u l t o n

3 N e w G e n e r a t i o n C o - o p e r a t i v e s a n d t h e L a w i n S a s k a t c h e w a n

C h a d H a a f

4 T a x a t i o n I s s u e s B r i a n J . T a y l o r

5 K e y S t e p s R e l a t i n g t o t h e I s s u a n c e o f S e c u r i t i e s I a n M c I n t o s h

6 T h e S e c o n d a r y T r a d e D e a n M u r r i s o n

7 A N o t e o n t h e S t r a t e g i c A l l i a n c e s C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s

A N o t e o n t h e M u l t i p l e - S t r i n g S t r u c t u r e C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s

8 M a r k e t i n g C o n t r a c t s T h e S u p p l y C o n t r a c t s b e t w e e n

M e m b e r s a n d t h e C o - o p e r a t i v e

S a m p l e N G C M a r k e t i n g A g r e e m e n t

A p p e n d i x A : Q u a l i t y S t a n d a r d s a n d M a n a g e m e n t P r a c t i c e s S c h e d u l e

A p p e n d i x B : D e l i v e r y N o t i c e

J a m e s H . G i l l i s

9 C o n t a c t I n f o r m a t i o n

1 0 P a r t i c i p a n t L i s t

This package of resource materials grew out of the New Generation Co-operatives Experts Workshop held on 6 March 2001 in Saskatoon. The workshop was part of a national research project on agricultural co-operative development sponsored by the Canadian Co-operative Association and le Conseil Canadien de la Coopération and funded by the Canadian Adaptation for Rural Development (CARD) Program of the Rural Secretariat, Agriculture and Agri-Food Canada.

CARD aims to facilitate the efforts of Canada’s agriculture and agri-food sector to respond positively to changes by taking advantage of new opportunities, fostering industry self-reliance, meeting future challenges, and becoming more competitive in the changing domestic and international policy environments and global market. We are grateful for the CARD funding that made this initiative possible.

The pilot project activities undertaken in Saskatchewan and southwestern Manitoba in connection with this research were organized and overseen by the Centre for the Study of Co-operatives at the University of Saskatchewan. The project benefited from the expertise and dedication of a number of individuals.

Murray Fulton, a professor in Agricultural Economics and Fellow in Agricultural Co-operation at the Centre for the Study of Co-operatives, University of Saskatchewan, oversaw the project from beginning to end, his expert guidance a natural extension of the work he has been doing for a number of years around NGCs.

Roger Herman, a consultant working for the Centre for the Study of Co-operatives at the University of Saskatchewan, was the NGC Pilot Project Co-ordinator. His organizational skills and tireless dedication kept the project on track and ensured the highest quality of professional results.

The Centre for the Study of Co-operatives also hired a number of consultants to assist with various phases of the work. These included Heather McNeill, who recently completed a master’s degree relating to NGCs and member commitment; Mary Ellen Hodgins, a management consultant with close ties to the legal and accounting communities; Martin Chicilo, Community Development Manager with the Saskatoon Credit Union, who has experience developing co-operatives in the agricultural sector in Saskatchewan; and Wendy Farrington, who provided administrative support.

N G C E x p e r t s W o r k s h o p • 6 M a r c h 2 0 0 1 • • • 1

N e w G e n e r a t i o n C o - o p e r a t i v e s

A n I n t r o d u c t i o n

B r e n d a S t e f a n s o n S t e f a n s o n & A s s o c i a t e s

he New Generation Co-operative (NGC) concept is attracting

attention as a means of increasing farm income and offsetting

some of the negative impacts of recent changes in agriculture. Saskatchewan has

new legislation that makes it possible to achieve all the benefits of the NGC model.

The purpose of this introduction is to provide a brief summary of the characteristics

of the New Generation Co-operative model.

The agricultural system is undergoing dramatic change. Changes in technology, in-

stitutional structures, regulations, the integration of value chains, and the globaliza-

tion of agricultural markets are resulting in an integrated system in which the family

farm is increasingly interwoven with the food distribution chain. Consumers today

are increasingly demanding choice, quality, consistency, and value. Producers and

the food industry are capable of providing what the consumer wants, but only if

changes are made to the structure of agriculture. Advances in biotechnology and in-

formation technology make it possible to engineer food at every level, from farm

gate to dinner plate. Biotechnology enables the isolation and incorporation of spe-

cific traits in plants and animals, effectively providing what the consumer wants.

Information technology enables the industry to monitor consumer preferences and

track products throughout the value chain, incorporating this information at all

levels.

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B r e n d a S t e f a n s o n

2 • • • C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s

These technological changes also necessitate changes in marketing channels. The

preservation of product identity is required to assure that the character-specific

product reaches the consumer who is demanding it. Commodity markets (where

products are gathered, mixed, and passed to processors who produce generic food

goods) are not structured to accommodate the designer products of the modern food

chain. More direct marketing channels, such as production contracts and vertical in-

tegration, are required to maintain the identity of genetically altered or organically

grown agricultural products. Experts predict that the vertical integration of market-

ing channels will continue to escalate.

Another change that profoundly affects Saskatchewan farmers is the loss of the

WGTA, or “Crow” subsidy. Farmers now shoulder the full cost of transporting their

raw commodities to distant ports. Saskatchewan producers half-way between Van-

couver and Thunder Bay have witnessed the result of this change. The net effect of

all these changes is obvious to the farmers: lower returns for primary production.

Farmers have done everything in their power to adjust to these changes. They have

increased their acreage, diversified into special crops and livestock, and reduced

costs wherever possible. New strategies, different organizational structures, and new

attitudes are necessary if Saskatchewan agriculture is to survive.

Farmers can exploit their position within a vertically integrated agricultural system

if they retain ownership of their products beyond the farm gate and invest in ven-

tures that add value to those products. The New Generation Co-operative model of-

fers farmers the opportunity to join together to move up the value chain and capture

some of the profits. The success of this structure has been witnessed in Minnesota

and North Dakota, where sugar beet (since 1974), bison, and durum (since 1990)

producers have owned processing facilities and gained returns, in the form of divi-

dends, from those ventures. Other examples of NGCs include facilities to process

organic grains, soybeans, eggs, specialty cheeses, and edible beans.

N G C s : A n I n t r o d u c t i o n


The NGC structure is unique, particularly in its share structure, which is character-

ized by three classes of shares: membership, equity, and preferred. The membership

share gives the holder the right to vote and to purchase equity shares, which are at-

tached to delivery rights. NGCs are organized to add value to an agricultural com-

modity such as bison or durum. Only producers of the commodity can hold member-

ship shares, thereby ensuring that control of the venture remains in the hands of the

producers. NGCs adhere to the basic principle of co-operation set out by the Roch-

dale Society of Equitable Pioneers in 1844: democratic control, and one member, one

vote. Voting rights are tied to membership, independent of the level of investment.

This ensures that no one member can exercise control over the group.

The equity share allocates delivery rights to the co-operative and raises the capital

necessary for establishing the venture. Each equity share purchased gives the mem-

ber the right and the obligation to deliver one unit of product (i.e., one bison or one

bushel of durum) to the co-operative for processing. This is a two-way contract: the

member is committed to deliver, and the co-operative is committed to take delivery.

The contract sets out the standards for quality, and delivery is regulated to keep the

plant running at capacity. In today’s market, quality and consistency are extremely

important. Therefore, the delivery contract sets out specific quality conditions. The

co-operative can reject deliveries if the products do not meet these quality standards.

Rarely is this necessary, however, because the members contract only a portion of

their production to the co-op, and they select the highest quality product for delivery

to their own processing plant. In the event that a member is unable or unwilling to

make delivery, the co-operative will purchase the amount of the product covered by

the contract and charge the cost towards the member’s equity account. This strategy

ensures that the co-op will have a consistent quality and quantity of product, and can

focus on developing markets.

The purchase of delivery rights (equity shares) represents a significant investment

on behalf of producer-members and a significant equity infusion for the co-opera-

B r e n d a S t e f a n s o n


tive. In 1990, for example, the North American Bison Cooperative sold 180 mem-

bership shares at a cost of US$100 each. These 180 members purchased a minimum of

ten equity shares at a cost of US$250 each, a minimum investment of US$2500. The

sale of delivery rights is a mechanism for securing start-up capital. Member equity

investment represents 35–50 percent of the start-up costs. The obvious benefit to the

co-operative of low debt is augmented by the benefit of member commitment. The

loyalty of members is locked in through the contract and the investment; the

member has made a large investment and will act to ensure the success of the ven-

ture. The equity shares are tradeable and transferable. The shares have value and can

be sold to other producers with the approval of the board of directors. Shares can be

passed on to the next generation along with other assets.

The preferred share allows the co-operative to invite investment from non-produc-

ers. Preferred shareholders cannot vote except in certain circumstances, as described

in the legislation. The preferred share offers a limited, fixed rate of return. Commu-

nities and non-producers choose to purchase preferred shares because they want to

support development in their communities and encourage job and wealth creation

close to home.

NGCs are select- or closed-membership co-operatives. The feasibility study deter-

mines the most efficient plant size, which, in turn, determines the amount of product

the plant can accept. Equity shares are issued to members based on the capacity of

the plant. Once the allotment of shares is sold, the membership is closed. New

members will be accepted and additional equity shares issued if the plant expands.

Comprehensive feasibility studies and business plans are critical to the success of

these ventures. NGCs often operate in niche markets, where it is important to under-

stand the type, quality, and quantity of product demanded. A clear understanding of

markets and consumers has enabled these ventures to serve markets that large corpo-

rations cannot.

N G C s : A n I n t r o d u c t i o n


Although some co-operatives have actually increased the price of the raw commo-

dity, the primary economic benefit to members flows from the dividends of pro-

cessing and marketing. Producers are paid market price for the delivery of their raw

commodity, but because they own the processing plant, they gain returns from pro-

cessing activities as well. They have vertically integrated upwards in the food in-

dustry and captured the returns to primary and secondary processing.

The vertically integrated structure encourages the effective use of market and pro-

duction information. The structure enables market information to be combined with

local production knowledge to produce the type of product required to serve lucra-

tive niche markets.

The term New Generation Co-operative is not a magic structure, and it should not be

applied to ventures that do not incorporate the strategies of two-way delivery con-

tracts and high member equity investment. Producers must be willing to commit

time to the development process, to invest sufficient equity to capitalize the project,

and to contract product to supply the plant, or the project will not succeed. If pro-

ducers are not committed through delivery contracts and investment, it will be diffi-

cult to leverage other investment funds, either as debt or outside investment capital.

If the two-way contracts are replaced with softer delivery agreements, the risks to

the co-operative increase because it will not have a secure supply of product.



W h y N G C s ?

M u r r a y F u l t o n , P r o f e s s o r a n d H e a d D e p a r t m e n t o f A g r i c u l t u r a l E c o n o m i c s , a n d F o r m e r D i r e c t o r C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s U n i v e r s i t y o f S a s k a t c h e w a n

here are two questions that need to be addressed: first of all, “Why

a co-op?” and second, “Why a New Generation Co-op structure?”

Simply stated, a co-op is an organization in which the owners are the users and the

users are the owners. For producers, the most important reason for forming a co-op

is when there is something a group can accomplish that individuals cannot accom-

plish on their own. There must be some benefit from collective action; by producing

in larger volumes, for instance, a group of farmers might be able to reduce their

costs and access a different market.

A second reason for choosing a co-operative structure is when the activity a group

of farmers wishes to undertake involves a highly specific asset. I will return to this

later.

The third point is: choose a co-op when relationship risk is important. One of the

key characteristics of any co-op is the principle of “one member, one vote.” If a

group of farmers is putting money into a particular activity, the principle of “one

T

M u r r a y F u l t o n


member, one vote” allows each participant to feel that he or she has some involve-

ment in the organization. It is also a way of dealing with the mistrust of one another

that farmers often feel. Our research has shown that it is often the case that when

farmers realize that they have to do something jointly, they concurrently realize that

they don’t quite trust the other parties. “One member, one vote” becomes a means of

developing the trust that will be necessary to carry on the activity, because everyone

knows that they will each have a say in the operation. They also realize, of course,

that everyone else has a say in the operation, and the only way to make the under-

taking work is if they can find consensus.

The alternative is not to form a co-op but to create a standard corporation in which

voting is on the basis of investment. This can create problems of its own, as it can

potentially allow a small group of people to take control based on the size of their

investment. When a small group of investors wants to control a particular activity or

process and brings in others simply to supply product, that is an excellent reason not

to form a co-op. Any number of other organizational structures would work better.

Indeed, ownership and control by a small group, with the majority of individuals in a

supplemental role, is not a co-operative.

The key characteristics of a New Generation Co-operative (NGC) are: it involves

some kind of processing or transformation; it has a closed membership; it requires

fairly substantial investments by the members at the beginning; there is a two-way

delivery right signed between the member and the co-op; and, finally, delivery rights

are tradable. Producers should look at a New Generation Co-op model when a trans-

formation of the product—whether in time, space, or form—is being carried out, and

when either quality or quantity is important in this transformation.

As suggested above, one of the key questions in forming an NGC is, “Is there a

highly specific asset in place, in either production or processing?” And the key

question in defining a highly specific asset is, “What is the value of the asset or the

investment in its next best use?” If the value is low, then the asset is specific. In

W h y N G C s ?


other words, if what you can get for the sale of this asset is significantly below what

it cost you to purchase it, then you have a highly specific asset. One example would

be a new production process that nobody else has invested in; if you invest in it and

then try to resell it, you likely won’t get 25¢ on the dollar. Large research and devel-

opment expenditures, high advertising costs, and the purchase of specialized equip-

ment are all examples of highly specific assets. If the co-op is going to be investing

in these kinds of assets, an NGC is likely the most appropriate organizational

structure.

If a group has made a substantial investment in a highly specific asset, it wants to be

sure that it will receive the necessary volume of production from its farmer members

in order to make the operation work. As both producer and processor, each NGC

member has an incentive to provide the proper quantity and quality of product. In-

deed, under the delivery contracts of the NGC model, each member is obligated to

deliver the product regardless of market conditions, so that the co-op will be guar-

anteed a product source. The organization is thus assured that it will be able to carry

on and not have to sell off its assets.

A New Generation Co-op can be formed purely for marketing purposes if two

criteria are met. First, the co-op must do something that the members cannot do

individually, such as supply a consistent product year-round. Second, the NGC

structure must aid in undertaking the co-op activity. Does the delivery contract

enhance the consistency of supply? Are quality and quantity of product critical

factors in the co-op’s operations? If so, the New Generation Co-op is a model for

bringing those factors into the equation.

To summarize, form a co-op when a group can do something that individuals are

unable to do, when input from all members of the group is important, and when one

segment of the group is not looking for control. For an NGC when the investment

that the group must make is highly specific, when an assured supply of product

(often of a high quality) is important, and when a sense of ownership by all mem-

bers will aid in assuring supply and in ensuring good governance of the co-op.



N e w G e n e r a t i o n C o - o p e r a t i v e s a n d t h e L a w i n S a s k a t c h e w a n

C h a d H a a f C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s U n i v e r s i t y o f S a s k a t c h e w a n

o-operative law in Saskatchewan underwent a significant change

with the introduction of the New Generation Co-operatives Act

(hereinafter the Act) in January 2000. The Act provides a mechanism for agricultural

producers to join together to jointly market and/or process their products. New Gen-

eration Co-operatives (NGCs) have been formed in the US as a way for farmers to

increase their share of the consumer dollar and as a means of revitalizing rural areas.

Yet despite their success in the US, they have been slow to develop in Canada. The

introduction of legislation specifically accommodating the main elements of the

NGC is expected to increase the adoption of the model in Canada.

The purpose of this paper is to highlight the key features of the New Generation Co-operatives Act and to explain their importance. The paper is designed to be used by

individuals who wish to create an NGC and thus take advantage of its strengths as a

business vehicle. The paper will focus primarily on the differences between the New

C

C h a d H a a f


Generation Co-operatives Act and the more general Co-operatives Act. It is assumed

that readers have a basic knowledge of the Co-operatives Act and of co-operatives.1

Although the NGC Act contains a number of elements that distinguish it from the

Co-operatives Act, these elements are largely concentrated in four areas: articles and

by-laws; marketing contracts; finance; and fair dealing. This paper highlights the

relevant points in each of these areas, as well as offering a broader picture of the

NGC Act.

Articles and By-Laws

Every corporation and co-operative must set parameters and guidelines for its

governance through articles and by-laws. The New Generation Co-operatives Act addresses a number of important issues surrounding the articles and by-laws and

provides direction when applicable. These fall into the following areas:

• The dividends on common shares must have a maximum value set in the articles (s.6(2)(l)).

• The co-operative must indicate whether it intends to issue preferred shares, and it must delineate the rights and restrictions ascribed to each class of shares (s.6(2)(d)).

• The articles may specify the rules for distribution of property on dissolution of the co-op (s.6(2)(m)). The Act further clarifies this issue by allowing for the distribution to members either equally or on the basis of patronage (s.262(12)).

• The members’ power to manage the co-operative and to restrict the authority of the directors may be established in the articles (s.6(2)(n)).

The New Generation Co-operatives Act also contains some unique features:

1 Due to the relative newness of the New Generation Co-operatives Act, there are few sources that examine the differences between this Act and the Co-operatives Act. A good source of information is the speaking notes and outline presented by J.J. Dierker, QC, at the New Generation Co-operatives Experts Workshop of March 2001, available in the binder of materials circulated to workshop participants.

N G C s a n d t h e L a w i n S a s k a t c h e w a n


• The Act generally provides for more flexible share transferability. The transfer rights of common shares and s.35 membership-only preferred shares, however, must be listed in the by-laws as per s.7(1)(a)(iii).

• The by-laws of the co-operative may establish the obligation of the members to provide goods or to use its services where this is a condition of membership (s.7(1)(a)(v)).

Marketing Contracts

A key element in co-operative organizations is the relationship between the co-

operative and its members. In an NGC, this relationship takes form and is rooted in

the marketing or supply contract, which is an agreement with the members to sell or

deliver raw goods for sale, processing, or preparation. The marketing contract is

critical to the operation of an NGC, since it determines the supply of the raw product

that is marketed and/or processed by the co-operative. The agreement may outline

special characteristics and/or relevant details.

The NGC Act also provides additional direction to the relationship between the co-

operative and its members. The co-operative may act as an agent on behalf of the

members (s.215(2)(b)), and hold the goods in pools (s.215(4)). If the co-operative

holds the goods, there is no transfer of title (s.215(2)(a)). Members’ goods in the co-

operative’s possession are also precluded from liability attaching on behalf of the

co-operative’s creditors (s.215(3)). Other significant details of the contract may

include the payment to members for goods sold or delivered, the manner of charging

for the co-operative’s expenditures, and the deduction of a loan to the co-operative

or money used to buy shares in it (s.215(5)). The co-operative may also advance part

payment to the members for goods delivered, or to be delivered, as per the contract

(s.214(1)).

Because the Act provides NGCs a high degree of flexibility in arranging them,

marketing contracts can take many forms and be structured in numerous ways. The

articles and by-laws may house the marketing contract between the co-operative and

the member (s.6(6); s.7(2)), or the contract may exist as a separate entity as laid out

C h a d H a a f


in s.215. Where it is foreseen that an ongoing relationship with little deviation from

the initial terms will exist, the contract may be built into the articles or by-laws.

Contracts located in the articles are strongly entrenched. Any alteration of the

contract would constitute a fundamental change to the articles and trigger the

dissenter’s rights of the members and preferred shareholders (s.259). Marketing

contracts in the by-laws allow for increased flexibility, though modifications face

significant restrictions. Any change to the terms of a marketing contract in the by-

laws, including termination, would require a special resolution by the membership

(s.201(1)). A marketing contract peripheral to the articles and by-laws offers the

most flexibility. It may be structured as a uniform contract for all members, or

customized for each particular member, which would make it easier to effect

changes to the contract since consent need only come from the NGC and the

individual member. Changing the contracts of certain members and not others,

however, can give rise to issues of fairness.

In the event of a breach of the marketing contract, the NGC Act allows for several

remedies. The innocent party is entitled to seek an injunction preventing further

breaches (s.214(2)(a)), which is a particularly notable remedy because it enables the

innocent party to bypass the burden of proving irreparable harm. Also available is

any equitable relief specified in the contract and specific performance (s.214(2)(b),

(c)). Even member withdrawal does not discharge the duty to perform. The wide

range of remedies at the disposal of the innocent party reinforces the NGC’s

emphasis on performance of the contract and consistency in the delivery and

acceptance of product.

Financing

The financing of a co-operative often draws on numerous resources, including the

assumption of debt and the issuance of shares. The New Generation Co-operative

identifies its membership and obtains capital for its operations through its financing

structure. The NGC share scheme is dictated by its capital requirements. Each co-



operative will have common shares—essentially membership shares—but it may

also issue preferred shares in any number of classes (s.6(2)(d)). Common shares

are restricted to members only (s.243(1)(g)) and are sold at a par value (s.47(3))

established in the articles (s.6(2)(b)). Common shares do not represent a significant

source of capital for the NGC because the members’ required contribution is

typically set quite low.

Preferred shares are a more valuable source of capital for New Generation

Co-operatives, largely because of their flexibility and versatility. Of particular

importance are the delivery right shares, which are at the core of the NGC model

and are described in more detail below.

An advantage of preferred shares is that their classes may be structured with dif-

ferent rights and limitations, subject of course to the Act. Important elements in a

share class include voting rights at the directors’ election (s.34(1)) and the avail-

ability of shares to the public (s.33(1)(a)). Public preferred shares are pivotal

because they allow the community to support the venture and to indirectly parti-

cipate in developing the local economy. These shares also make the NGC accessible

to a much wider pool of investors, though a public offering requires full securities

disclosure.

Preemptive rights and the use of proxies are two other features of the NGC Act open

to preferred shareholders. Preemptive rights established in the articles (s.37(1))

allow shareholders the first right to any new offering of their respective class, up to

the percentage of interest held prior to its offering (s.37(2)). These rights provide

preferred shareholders some certainty of maintaining their interest in the NGC in the

event of another offering, thus discouraging squeeze-outs by the board. Preferred

shareholders who have the right to vote may also use proxies to represent them at

meetings. This right does not extend, however, to common shares (s.217(1);

s.216(2)).

C h a d H a a f


Although preferred shares may be structured with a number of rights and restric-

tions, the NGC Act establishes specific guidelines. Preferred shares are issued with

stated capital and maintain a stated capital account (s.48(1)). Both stated capital and

par value are subject to reduction, but only through special resolutions by members

and affected preferred shareholders (s.61(1)). Limitations are placed on any indivi-

dual shareholder’s interest, which is intended to prevent excessive power being held

in the hands of single parties and to ensure membership control, thus maintaining the

co-operative character. In s.40(1)(a), a preferred share class with director voting

rights attached has an interest ceiling of 10 percent on each holder, and the directors

elected by preferred shareholders cannot exceed 20 percent of the board (s.34(2)).

All other classes of preferred shares are limited to 25 percent interest by one holder

(s.40(1)(b)). Preferred shares are fully transferable, although transfers still require

the board’s consent (s.66(b)).

Within the preferred share category, the NGC Act specifically identifies and makes

available an important class of member-only shares—delivery-right shares—in s.35.

These shares are intrinsically connected to the marketing contract, together forming

the unique relationship between the NGC and its members. The marketing contract

establishes the obligation between the member and the co-operative, while s.35

shares delineate the scope of the duty. S.35 shares serve two key purposes: they

provide a large share of the capital for the NGC and they are the primary means for

earnings participation. Members who subscribe to such shares are obligated to

provide or deliver a specified good or service, or have the right to receive a good or

service in accordance with the contract between themselves and the co-operative

(s.35(d)). This represents a critical departure from a traditional co-operative, where

patronage is generally voluntary. In the NGC, the supply of product from the

members is predetermined quantitatively and usually qualitatively, and performance

of the obligation is mandatory.



S.35 shares are also closely linked to the processing emphasis of an NGC. Typically,

each share represents one unit of product the member must deliver to the co-opera-

tive. The obligation is usually different for each member, depending upon the num-

ber of shares owned. However, it is common for minimums and maximums to be

imposed on s.35 share interests, an action undertaken to maintain a certain degree of

homogeneity among members. The price of the share is established by first deter-

mining the optimal efficiency of the processing facility and the product necessary to

meet that capacity. The capital required for operational start-up is then divided by

the amount of product needed for processing; the resulting figure is the share price.

Due to the fixed number of units the facility can accommodate, and the s.35 shares

based on those units, membership is consequently restricted. Thus, with s.35 shares,

marrying the producer’s capital contribution to delivery rights and obligations

ensures a consistent supply of product for the co-operative and a guaranteed market

for the producer, with the producer’s patronage being directly proportionate to his or

her equity.

Several additional rights and restrictions apply to s.35 shares. The shares must

belong to a preferred share class (s.35(b)), are accessible only to members (s.35(a)),

and the articles cannot be amended to allow nonmembers to hold them (s.243(1)(g)).

In addition, s.35 shares carry no voting rights on director elections (s.35(c)), but

shareholders may vote on the basis of their membership. Special participation rights,

enumerated in s.35(e), allow holders to receive the surplus by way of patronage

dividends or bonuses, to receive reserve amounts through dividends, and to have

access to the remaining property on the co-operative’s dissolution. The profits from

the processing operation are usually distributed through the patronage dividends of

s.35 shares. Like standard preferred shares, s.35 shares are fully transferable

(s.66(a)), subject only to the board’s approval (s.68).

The Act also provides guidelines for the regulatory bodies governing securities.

Any co-operative issuing or trading securities initially falls under the jurisdiction

C h a d H a a f


of the Co-operative Securities Board (s.318(1)), which has the option to direct the

matter to the Saskatchewan Securities Commission (s.317(2)). Conversely, under

s.317(3), the co-operative itself may elect to be governed by the commission. Any

securities issuance or trade for membership shares, or exchanges involving bonds or

debentures with financial and governmental bodies, are exempted from the juris-

diction of the Co-operative Securities Board (s.320(1)), although each co-operative

must file a disclosure document with the board for a securities offering (s.319(4)).

Fair Dealing

The NGC Act addresses extensively the termination of the relationship between

the NGC and its members, and the standards for fair dealing. When the relationship

between the co-operative and a member has become untenable, the Act provides a

number of means for members to leave the organization: withdrawal; expulsion by

the board; or expulsion by members. In the event that a member voluntarily with-

draws, the Act outlines proper conduct and procedure. A member may withdraw if

notice is given (s.209(1)), and the co-operative has five years from the date of the

notice to buy back the shares. Common shares are purchased at par value and the

s.35 shares are purchased at the formula price set in the articles. If the articles are

silent in this regard, then the buy back must be at fair market value (s.209(2)(a)).

Loans to the co-operative by the member must be repaid, along with any amount

held to the member’s credit (s.209(2)(b)). Even though the member has withdrawn

from the co-operative, however, he or she is still obligated to fulfill the marketing

contract (subject to the board’s discretion) until another suitable buyer can be found

to take on the obligation (s.209(4)).

The Act provides a similar process for dealing with member expulsion from the co-

operative. Termination of membership by the board requires a special resolution

(s.210(2)), while expulsion at the hands of the members must be approved by a two-

thirds majority (s.211(1)(b)). Upon an effective expulsion, the marketing contract

between the member and the co-operative is terminated (s.210(8)(a)). However, the



co-operative must buy back all s.35 shares at the price described in the articles, or

at fair market value if the articles are silent (s.210(7)(a)(ii); s.211(2)(c)). The co-

operative is also obligated to purchase the member’s common shares at par value,

and pay out all outstanding loans to the member or credit held on the member’s

behalf (s.210(7)(a)(ii); s.210(7)(b); s.211(2)(c)). The NGC Act ensures members are

dealt with in a fair manner and includes an appeals process to the registrar (s.212).

If a co-operative resolves to pursue fundamental change, the NGC Act addresses this

in the form of dissenter’s rights. Members or preferred shareholders have standing to

dissent where the co-operative moves to: amend the articles in such a way that it will

adversely affect their interest or adjust the restrictions on business activities; amal-

gamate; seek a continuance; or drastically alter its property holdings (s.259(1)). Pre-

ferred shareholders affected by an article amendment as per s.246 may dissent on

significantly broader grounds, outlined in s.243 and s.244 (s.259(2)). This right to

dissent is excluded on issues of a co-operative name change and/or an increase in the

number of directors. A dissenting member or preferred shareholder may object to a

proposed resolution (s.259(3)); if the resolution passes, the objection is deemed to

be notice of intent to withdraw (s.259(4)). Once the impugned resolution has passed,

the dissenting party may issue an actual notice to the co-operative. This notice de-

mands withdrawal, payment of fair market value for common shares, repayment of

any other interest outstanding, and the set price as established in the articles, or fair

market value, on preferred shares (s.259(6)(c)). The co-operative is then obligated to

pay the applicable amounts.

Joint membership provisions in the Act protect the co-operative from any shortages

and allow producers to distribute some of the risk and obligations of marketing con-

tracts. A membership jointly held places full rights and responsibilities of member-

ship upon all parties (s.70(1)(a)). In addition, the Act stipulates that all parties hold-

ing a membership jointly have joint and several liability on all obligations respecting

the membership (s.70(3)(b)).

C h a d H a a f

1 0 • • • C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s

Memberships and their respective rights are given more flexibility in the NGC Act than in traditional co-operatives. Each membership is fully transferable (s.66(a))

subject to the directors’ approval (s.68). On the death of a member, the membership

can be transferred to a beneficiary or executor regardless of their membership status

(s.69(3)(a)), but although the beneficiary may enjoy most member rights and honour

the obligations, voting is excluded (s.69(11)). The membership may also be subject

to certain additional restraints. For example, the co-operative has the right to put a

lien on a member’s interest where monies payable to the co-operative pursuant to

the articles or by-laws are considered debt (s.64); this practice can also apply to

other types of shares (s.65).

In terms of dissolution, the NGC Act stays fairly true to the Co-operatives Act. A

key difference, however, is worth noting. The NGC Act specifies that the articles

may indicate how the property of the co-operative is to be distributed upon disso-

lution (s.6(2)(m)). In the event of the articles being silent, the property is to be

distributed to a charity, another co-operative, or anyone the registrar designates

(s.262(13),(8)).

Conclusion

The New Generation Co-operative holds promise as an effective vehicle for

agricultural producers to move beyond pure production to access processing and

preparation markets. The template for the NGC model is specifically outlined in the

recently legislated New Generation Co-operatives Act, which details the items that

distinguish it as a distinct business organization: the articles and by-laws, marketing

contracts, the method of financing, and fair dealing. Each element contributes to the

NGC’s unique character and gives it the capacity to more efficiently provide produ-

cers the opportunity to move up the food value chain. Showing significant potential



for producers and practitioners on a corporate level, the NGC model is also another

resource to be tapped in the future development of rural Saskatchewan.2

2 Readers will find more material on this subject in another research paper prepared by and available from the Centre for the Study of Co-operatives titled A Comparison of New Generation Co-operative Legislation in Alberta, Saskatchewan, and Manitoba.



T a x a t i o n I s s u e s

B r i a n J . T a y l o r , F C A D e l o i t t e & T o u c h e L L P

How Are Members and Holders of Preferred Shares Taxed?

Purchase of Shares The purchase of shares is not a tax deduction.

Patronage Dividends Members pay personal (or corporate) income tax on all (allocated and deferred)

patronage dividends received from an NGC. The income is taxed in the year it is

received by the member.

Dividends on Preferred Shares Holders of preferred shares pay tax on dividends received from an NGC.

Dividend Tax Credit The dividend tax credit applies to taxable dividends received by individuals but

excludes patronage dividends.

Withholding Tax An NGC is required to deduct and withhold 15 percent tax on the portion of

patronage payments (or sum of) exceeding $100. The NGC remits the tax to the

Receiver General on account of the member’s tax liability. When the member

files a personal (or corporate) income tax, the tax withheld will either reduce

B r i a n T a y l o r


taxes otherwise payable or increase the tax refund.

Capital Gains Tax If a member sells shares, only 50 percent of any gain is taxable. If the member is a

Canadian-controlled private corporation as defined in the Income Tax Act of Canada

(the Act), the nontaxable portion of the capital gain can be paid on a tax free basis to

its shareholders if prescribed conditions are met.

How Are NGCs Taxed?

Incorporated organizations, such as NGCs, follow corporate income tax laws.

Unallocated Net Income Unallocated net income is taxable at the corporate rate, while deferred patronage

allocations are taxed at the member level.

Dividends on Preferred Shares NGCs may choose to pay dividends to holders of preferred shares. Dividends

on preferred shares are not deductible in computing the income of the NGC.

More information regarding dividends on share capital is available at

www.ccra-adrc.gc.ca/E/pub/tp/i362ret/i362re.txt.html.

Federal Large Corporations Tax (LCT) NGCs will be subject to LCT if capital (as defined in the Act) net of eligible invest-

ments exceeds $10 million. Capital includes debt, unallocated retained earnings, and

other items. The tax rate is presently 0.225 percent of capital in excess of $10 million.

Associated corporations must share the $10 million exemption.

What Tax Deductions and Credits Apply to NGCs?

Tax deductions reduce an organization’s taxable earnings. Tax credits reduce the

amount of tax an organization pays.



Patronage Dividends Patronage dividends are a tax deduction for a corporation such as an NGC. However,

a patronage payment is deductible only if it is paid within the year, or within twelve

months of the end of the year, to customers. A patronage payment is also deductible

if it was made in a previous year in which such payments were not deductible.

Credit is not given to those customers to whom the patronage allocation would be

less than $5.00, and no deduction is allowable to the NGC in computing income for

such credits not given.

More information regarding patronage dividends is available at


Interest on Loan Capital Interest on loan capital is deductible in computing income provided it is paid or

payable in accordance with the Act. However, interest is not deductible unless it is

paid pursuant to a legal obligation to pay the interest.

More information regarding interest on loan capital is available at


Small Business Deduction The small business deduction is an annual tax reduction on up to $200,000 that

may be claimed by a Canadian-controlled private corporation (CCPC) for carrying

on an active business in Canada other than a “specified investment business” or a

“personal services business.” In Saskatchewan, it reduces the effective corporate tax

rate from 45 percent to 20 percent. Corporations with LCT capital in excess of $15

million are not eligible for this tax reduction.

More information regarding the small business deduction is available at

www.ccra-adrc.gc.ca/E/pub/tp/i73r5et/i73r5e.txt.html.

B r i a n T a y l o r


Tax Considerations for NGCs in Saskatchewan

Saskatchewan Manufacturing and Processing Investment Tax Credit Corporations filing a T2 Corporation Income Tax (CIT) Return may be eligible for

the Saskatchewan Investment Tax Credit (ITC) for Manufacturing and Processing.

The ITC is a nonrefundable income tax credit that is designed to encourage plant and

equipment investment for use in manufacturing and processing activities in Saskat-

chewan. The ITC applies as a percentage of the total capital cost of eligible building

and machinery and equipment purchases. The current rate is 6 percent of eligible

new or used acquisitions. The ITCs can only be used to offset Saskatchewan income

tax otherwise payable.

More information on the ITC is available at www.cbsc.org/sask/sbis

Saskatchewan Corporation Capital Tax (CCT) The CCT provides exemption for “natural product” co-ops where at least 90 percent

of the members are individuals or other co-operative corporations and none of the

members, apart from other co-operative corporations, has more than one vote.*

The capital tax rate is currently 6 percent of paid-up capital in excess of $10 million.

This $10 million is available to every corporation, and does not have to be shared

with associated corporations.

*This exemption may not apply to NGCs because preferred shareholders have

limited voting rights (the Saskatchewan Department of Finance is apparently

working on this issue).

When Do NGCs Pay Income Tax?

Annual Payments An NGC only has to make one annual income tax payment if the federal taxes

payable for the year or the prior taxation year are $1,000 or less. An NGC will also

make annual income tax payments if the corporation is in its first taxation year and

is not a continuation of a predecessor corporation.



Instalment Payments After the first year of taxation, and if the prior year’s federal taxes were $1,000 or

more, NGCs pay income tax in monthly instalments. Instalment payments are due on

the last day of every complete month of an NGC’s taxation year. The first payment is

due one month minus a day from the starting date of the corporation’s taxation year.

The rest of the payments are due on the same day of each month that follows.

Late Returns and Penalties Penalties may apply if an NGC files the return late. The penalty for filing a late

return is 5 percent of the unpaid tax that is due on the filing deadline, plus 1 percent

of this unpaid tax for each complete month that the return is late, up to a maximum

of twelve months. In exceptional cases, interest and penalties on late payments can

be waived or cancelled.

Interest Interest is charged on late instalments and late tax payments. The current rate

charged is 10 percent. This interest expense is not deductible for tax purposes.

Interest is also paid to the taxpayer on refunds. The rate is 2 percent less than

the rate charged. The current rate is 8 percent. This interest income is taxable.

Filing a Corporate Tax Return NGCs based in Alberta, Manitoba, and Saskatchewan mail the T2 Corporate Income

Tax Return to: Tax Centre, Winnipeg MB, R3C 3M2.

Record Keeping Books and records or electronic records, including related accounts and vouchers,

must be kept for at least six years from the end of the last year to which they relate.

Books and records or electronic records must be kept until two years after the date

the corporation is dissolved.



K e y S t e p s R e l a t i n g t o t h e I s s u a n c e o f S e c u r i t i e s 1

I a n M c I n t o s h 2 S a s k a t c h e w a n S e c u r i t i e s C o m m i s s i o n

Definition

security is defined under The New Generation Co-operatives Act (hereinafter referred to as the New Gen Act) as including a pre-

ferred share, a debt obligation of a co-operative, and a certificate evidencing that

share or debt obligation, and, for the purposes of Parts XVI, XIX, and XXII, includes a

common share and member loan.

Why Do NGCs Issue Securities?

NGCs will need to assemble sufficient financing to develop and initiate the operation

of their businesses. It is unlikely that the total capital required could be borrowed

from financial institutions; therefore, the co-operative must seek investment from its

members, and possibly the public. Capital raised in this manner involves the issuing

of securities. These securities can be in the form of:

• Common shares, which may be sold only to members;

• Preferred Shares, which include the following two types:

1 This paper does not necessarily represent the views of the Saskatchewan Securities Commission, nor does it constitute a legal opinion. Readers are advised to seek professional legal advice before proceeding. 2 With acknowledgement to previous materials prepared by staff of Economic and Co-operative Development.

A

I a n M c I n t o s h


• Member Right Shares, which may only be sold to members, which carry

no vote on election of a director, and which obligate its holder to provide

the co-operative a specific good or services or give the holder the right to

receive from the co-operative a specific good or service; and

• Preferred Shares in a Series, which may be sold to members and the

general public, and may include specified rights and restrictions;

• Member Loans, including any agreement by which a member agrees to loan

money to the co-operative; and

• Other Debt Instruments, including bonds and debentures issued to members

or the general public by which the co-operative agrees to repay, with or

without interest.

Part XXII—Security Issues of the New Gen Act, together with the Regulations, set

out the rules governing how an NGC can issue securities:

Develop Detailed Business Plan Consult with ECD and SSC on Options Determine Eligibility of NGC Act Exemptions

Co-op Securities Board Securities Commission Prepare Prospectus and Registration for Approval Examine Statutory Exemptions Examine Discretionary Exemptions Determine Eligibility for Small Business Issuer Prepare Prospectus and Registration for Approval

T h e I s s u a n c e o f S e c u r i t i e s


Develop a Business Plan

Complete a business plan, including details of sources of financing and a detailed

explanation of the business operations. For larger offerings, conduct a feasibility

study.

Consultations

The author encourages advance consultation with issuers and their professional

advisors to discuss their proposal, and for assistance in determining whether the

securities qualify for existing exemptions or if a prospectus may be required. Please

contact the Deputy Director, Corporate Finance, at (306) 787–5867.

Steps to Obtain Approval to Issue Securities

Approval to Issue Securities Unless the security is exempt under the New Gen Act or Regulations, the co-opera-

tive must apply to the Co-operative Securities Board (the Board) regarding the

issuance of securities. (The Board has the legislated responsibility for reviewing

and approving the securities offerings of co-operatives and setting such terms and

conditions on the approval as it sees necessary.) A co-operative also has the option

under the New Gen Act to advise the Board by written notice that all trades by the

co-operative in a proposed offering of the securities specified in the notice will

comply with The Securities Act, 1988 (hereinafter referred to as the Securities Act). This option is an important change from how securities offerings are dealt with

under The Co-operatives Act, 1996.

As a first step, a co-operative should determine if the proposed issue of securities is exempt from any review under the New Gen Act.



New Generation Co-op Act/Regulation Exemptions Examine the possibility of whether the offering of the securities could be exempt

under the New Gen Act or Regulations. Exemptions include:

A. bonds, debentures, or other indebtedness of or guarantees by a trust corporation or a loan corporation licensed pursuant to The Trust and Loans Corporations Act or an insurance company licensed pursuant to The Saskatchewan Insurance Act;

B. certificates or receipts of a trust corporation or a loan corporations licensed pursuant to the Trust and Loan Corporations Act;

C. bonds, debentures, or other indebtedness guaranteed by the government of Canada or of any province or territory of Canada;

D. any securities where the purchase is a requirement of membership in the New Generation Co-operative as set out in the by-laws and the total value of those securities purchased by the member does not exceed $1,000;

E. securities sold to a trust or loan corporation, an insurance corporation, a credit union, or a bank;

F. prepaid accounts where a member pays for goods and services in advance of delivery;

G. shares issues in payment of a dividend, or interest payment on shares, or a patronage dividend;

H. securities sold only to members of the co-operative, where all the members are also directors of the co-operative;

I. securities sold only to members of the co-operative where:

i. the proceeds are used to purchase assets that are used solely by or for members, and

ii. the cumulative amount raised using this exemption does not exceed $100,000;

J. securities sold only to members of the co-operative where:

i. the proceeds are used to pay any of the following costs:



a. costs related to the preparation of feasibility studies, business plans, and other similar documents, and

b. costs related to the preparation of any materials used or costs incurred in relation to an offering of securities by the co-operative; and

ii. the cumulative amount raised using this exemption does not exceed $100,000.

If the co-operative is unable to make use of these exemptions, it should look to the exemptions available under The Securities Act.

As previously indicated, the co-operative has the ability to have its trades done in

compliance with the Securities Act if it wishes.

Saskatchewan Securities Commission

The Securities Act, 1988—Statutory Exemptions If the co-operative determines that a statutory registration and prospectus exemption

under the Securities Act could be applicable to the proposed offering of securities,

the co-operative can elect, by written notice to the Board, to have all trades in the

proposed offering specified in the notice comply with the Securities Act. These

exemptions are included in detail in the “How To Raise Capital Using Exemptions”

paper prepared by the Securities Commission. To receive a copy of this paper,

contact the Saskatchewan Securities Commission at (306) 787–5299; alternatively, the

information is available on the Saskatchewan Securities Commission web site at:

www.ssc.gov.sk.ca.

Discretionary Exemptions If the issuance of the securities does not fit within the statutory exemption from the

registration and prospectus requirements of the Securities Act, then the co-operative

can apply to the Commission under Section 83 of the Act for a discretionary exemp-

tion waiving the registration and prospectus requirements of the Securities Act. The

Commission has the power to grant a discretionary exemption from both the pro-

spectus and registration requirements of the Act under this section. To apply for a



discretionary exemption, the co-operative must follow the procedure set out in

Saskatchewan Policy Statement 12–601, “Applications to the Saskatchewan Se-

curities Commission.” To receive a copy, contact the Saskatchewan Securities

Commission at (306) 787–5299; alternatively, the information is available on the

Saskatchewan Securities Commission web site at: www.ssc.gov.sk.ca.

It is possible to apply to the Board for a discretionary exemption under The New Generation Co-operatives Act. As guidance in preparing the application, the New

Generation Co-operative should follow the procedures set out in Saskatchewan

Policy Statement 12–601. The application should be sent to the attention of the

Secretary to the Board, c/o The Saskatchewan Securities Commission.

Before granting a discretionary exemption under Section 83 of the Securities Act, the

Commission must first be satisfied that it is not prejudicial to the public interest to

do so. There is no guarantee that the Commission will grant a discretionary exemp-

tion when applied for. The Commission will consider whether there are other factors

in place for public protection, making prospectus and registration requirements of

the Securities Act unnecessary.

Discretionary exemptions are often granted where a trade almost meets the require-

ments of a statutory exemption and the policy considerations behind that statutory

exemption are met, but, for a technicality, the trade does not fall within the statutory

exemption.

The Commission may grant a discretionary exemption in cases where there is a

special relationship between the NGC and the investors, and, through this special

relationship, the investors have a special knowledge both about the NGC and its

promoters. In this case, the investors may not require the protection afforded by

registration or the disclosure normally made in a prospectus.



Discretionary exemptions may be granted in cases where the Commission is

satisfied investors are knowledgeable, sophisticated, can protect themselves, and

don’t require the protection of the Securities Act.

In general terms, the Commission is open minded as to when it will grant a

discretionary exemption. It must be satisfied that the results will be that the same

level of public protection is provided, albeit in a different manner, as would be pre-

sent if the registration and prospectus requirements of the Securities Act had been

complied with. Discretionary exemptions usually have terms and conditions attached

to them, and may, or may not, require the use of an offering memorandum.

The sale of securities by an NGC pursuant to a discretionary exemption does not in

and of itself trigger any Continuous Disclosure Requirements or Resale Restrictions

unless such requirements are built into the terms and conditions of the discretionary

exemption received from the Commission. Therefore, an NGC will only become

subject to those Continuous Disclosure Requirements and Resale Restrictions that

are imposed as a term of the discretionary exemption. An issuer should look to the

terms of the discretionary exemptions for its requirements in this regard. It is usual

for the Commission to build in these types of requirements. This is the same with

respect to the report of sales that must be filed with the Commission after the use of

the discretionary exemption. The terms of the discretionary exemption received

must be reviewed to find the NGC’s requirements in this regard.

The most common discretionary exemption under Section 83 that could be used for

an NGC would be the Community Ventures Exemption.

Community Ventures Exemption This policy statement allows the NGC to apply for and the Commission to exempt

the NGC from the registration and prospectus requirements of the Securities Act.

The conditions that apply under the Community Ventures Exemption are:



a. the project must be located in a small community; b. the co-operative cannot raise more than $1 million; c. the investors must live within a certain geographic area of the small

community; d. all salespersons and promoters must live within the small community; e. there is no limit on the number of investors; and f. an offering memorandum approved by the Commission.

For complete information on this exemption, refer to the Community Ventures

Information Package available by contacting the Saskatchewan Securities

Commission at (306) 787–5299.

For information about the use of exemptions, call (306) 787–5879 (Legal Branch).

Prospectus Distributions

Should the New Generation Co-operative find that there are no statutory or discretionary exemptions available for its proposed security offering, then it is probable that a prospectus will be required.

A prospectus is a legal document by which securities are offered for sale. The

prospectus must contain full, true, and plain disclosure of all material facts relating

to the securities issued. It provides prospective investors with sufficient information

to enable them to make an informed decision about whether or not to purchase any

of the securities offered. The Securities Regulations establish the details as to the

form and content of the prospectus.

If this is the avenue taken, the co-operative again has a choice to make: whether the

offering will be subject to the New Gen Act, or whether an election will be made to

have the offering reviewed and subject to the Securities Act. In either case, the co-

operative needs to do a fair bit of work in advance of preparing and filing a pros-

pectus. This work would include a detailed business plan and a feasibility study.



The Disclosure Document

The information disclosure requirements for a prospectus filed under the New Gen

Act and the Securities Act are essentially identical. The form to be followed in pre-

paring a prospectus for a New Generation Co-operative is the same in either case,

Form 13—Information Required in Prospectus of Industrial Company. This form is

found in The Securities Regulations. The Board has directed that this form is to be

followed if the prospectus is filed under the New Gen Act, and subject to review and

approval by the Board. This same form is compulsory if the New Generation Co-

operative elects to have the distribution subject to the Securities Act.

The Review Process

The review process for prospectus filings is the same under the Securities Act and

under the New Gen Act. The materials are to be filed with the Deputy Director,

Corporate Finance, with the Commission. The Deputy Director also serves as

Secretary to the Co-operative Securities Board. The prospectus and any supporting

materials will be reviewed in detail by the staff of the Commission. A letter request-

ing changes or additional detail will normally be provided within ten working days

of receiving the prospectus. Thereafter, it will be up to the New Generation Co-op-

erative to resolve the comments. A revised prospectus incorporating the changes will

then be required for further detailed review. Additional comments may be raised

once more, with a further draft filed for review. This review process can take from

six to eight weeks.

Once the staff are satisfied with the disclosure, and the selling process, as outlined

below, has been appropriately addressed, approval to sell the securities will be given

by one of two means. If the filing was made under the Securities Act, the Deputy

Director, Corporate Finance, will issue a final receipt for the prospectus and selling

may then proceed. If the filing has been made under the New Gen Act, the deputy

director will provide a copy of the final prospectus along with a recommendation to

the Board. Conditions of approval may also be provided to the Board. If the Board is



in agreement with the recommendations, they will approve the prospectus, and sales

may commence.

For further information on the prospectus processes, contact the Deputy Director,

Corporate Finance, at (306) 787–5867.

Registration and the Selling Process

A major consideration for a New Generation Co-operative will be the manner in

which it contemplates the selling of the securities offered by prospectus. Under the Securities Act, the securities must be sold by a registrant company. Further, individ-

uals selling the securities must also be registrants.

Frequently, smaller issuers are unable to make arrangements with a registrant to

sell the securities offered by their prospectus. To assist these smaller issuers, the

Commission has approved General Ruling Order (GRO) 31–902—Saskatchewan

Small Business Security Issuer. This GRO relaxes the normal registration require-

ments and allows the issuer to register as a security issuer; in other words, it will be

offering its own securities for sale. The individuals designated by the issuer to sell

the securities on its behalf will be required to take a one-day sales course provided

by the staff of the Commission, and then must write and pass an examination, taken

the same day as the course. This course provides basic information on the dos and

don’ts of selling securities. Additional detail on this GRO follows.

The Board has indicated, in meetings held to discuss New Generation Co-operatives,

that the selling issue is also of concern to them. They have indicated that they, too,

will have concerns with how the securities may be sold, and it is likely that they will

require the New Generation Co-operative and its sales force to follow the same

requirements as set out in GRO 31–902.

To date, there are no precedents in this area.



Ongoing Continuous Disclosure Requirements

Once a New Generation Co-operative has raised money by prospectus, it will be

required to communicate with its security holders on a regular basis. If the offering

has been done under the Securities Act, the ongoing reporting requirements are

statutory, and would include providing interim quarterly financial statements and

annual audited financial statements, as well as annual proxy and information circular

materials.

If the offering has been done under the New Gen Act, co-operatives should anticipate

that the Board will make similar reporting mandatory as a condition of approval for

the offering. Again, at this time there are no precedents to which we can refer for

additional guidance.

Multijurisdictional Issues

It is possible that a New Generation Co-operative will wish to raise capital in more

than one province, for a variety of reasons. In these scenarios, it is important that

careful consideration be given as to which legislation the offering will be filed under

in Saskatchewan. If the same prospectus is to be filed in other provinces, it will be

reviewed under securities legislation in those provinces. There are co-ordinated

mutual reliance review systems for reviewing offerings filed in more than one pro-

vince, provided that the offering is filed under securities legislation in all provinces.

This type of co-ordinated review is not possible if it is filed in Saskatchewan under

the New Gen Act, but filed elsewhere under the securities legislation of the other

provinces. This will create a significant problem for the review of the securities

filing. We encourage discussion of this issue with the officers of the New Gen-

eration Co-operative well in advance of filing a prospectus. Contact the Deputy

Director, Corporate Finance, at (306) 787–5867.



General Ruling Order 31—902 Saskatchewan Small Business Securities Issuer

If your NGC does not fit the criteria for the exemptions above, this general ruling

order can be used to relax the registration requirements of the Securities Act where

the directors, officers, or others will be selling the securities, and the NGC meets the

following criteria:

a. is incorporated, continued, organized, or established pursuant to the laws of the Province of Saskatchewan;

b. has its registered office and head office located in Saskatchewan; c. carries on a substantial part of its businesses in Saskatchewan, in that

75 percent of its business assets are or will be located in Saskatchewan, and 75 percent of its expenses will be incurred in Saskatchewan;

d. is controlled by residents of Saskatchewan, in that 75 percent of its voting securities are held by residents of Saskatchewan; and

e. two-thirds of its promoters and directors are residents of Saskatchewan.

While this General Ruling Order relaxes the registration requirements for the NGC,

it would still require the use of a prospectus to issue the securities. For complete

information on this exemption, refer to the Saskatchewan Small Business Securities

Issuer Package that is available by contacting the Saskatchewan Securities Commis-

sion at (306) 787–5876 (Registration Branch) and on the Saskatchewan Securities

Commission’s web site at www.ssc.gov.sk.ca



T h e S e c o n d a r y T r a d e 1

D e a n M u r r i s o n S a s k a t c h e w a n S e c u r i t i e s C o m m i s s i o n

Introduction

his paper builds on the paper “New Generation Co-operatives:

Key Steps Relating to the Issuance of Securities” (the Primary

Trade Paper), which describes the process for a primary trade of securities of a

New Generation Co-operative (NGC). A primary trade is a sale of securities of an

NGC by the NGC from its treasury to investors.

A secondary trade is a sale of securities of the NGC by the holders of those secur-

ities (having acquired the securities from the NGC under a primary trade). This paper

discusses if and how a holder of securities in an NGC, having purchased securities

from an NGC, can resell them. An additional term of note is that, if there is a market

for the securities of an NGC, organized (like an exchange such as the Canadian

Ventures Exchange (CDNX) or not organized (like sales directly between individual

holders of the securities of the NGC), those sales are referred to as being made in the

secondary market.

1 This paper does not necessarily represent the views of the Saskatchewan Securities Commission, nor does it constitute a legal opinion. Readers are advised to seek professional legal advice before proceeding.

T

D e a n M u r r i s o n


Background

The first thing to note is that securities of an NGC are securities within the meaning

of The Securities Act, 1988 (hereinafter the Securities Act). But for the provisions of

The New Generation Co-operative Act (hereinafter New Gen Act), a trade or sale of

securities of an NGC, whether it be a primary trade or a secondary trade, would be

subject to the Securities Act.

The New Gen Act contains a waiver or exemption provision that says the Securities Act does not apply to a primary trade of securities of an NGC (although the NGC can

elect to move its offering of securities or primary trade back under the provisions of

the Securities Act if it wishes, or the Co-operative Securities Board (CSB) can direct

that such offering be subject to the Securities Act if the CSB feels that it would be in

the public interest to do so). There is no similar waiver or exemption provision in the

New Gen Act for a secondary trade of securities of an NGC by a holder of those

securities. In short, the secondary trades of securities of an NGC by the holders of

those securities are subject to the Securities Act. This is true whether the primary

trade with respect to the securities was carried out under the New Gen Act or the

Securities Act.

When considering the application of the Securities Act to a disposition of a security

like a security of an NGC (whether a primary trade or secondary trade), there are

always two questions to consider. The first question is, Is the disposition of the

security a trade within the meaning of the Securities Act? This generally means, is

the disposition a sale or other disposition for valuable consideration? If the disposi-

tion is a trade, the person or company selling the security, whether it be a primary

trade or secondary trade, must:

• be registered under the Securities Act to do the trade; • find a statutory registration waiver or exemption in the Securities Act from

the requirement to be registered under the Securities Act to do the trade; or

T h e S e c o n d a r y T r a d e


• apply for and obtain from the Saskatchewan Securities Commission (SSC) a discretionary registration waiver or exemption from the requirement to be registered under the Securities Act to do the trade.

The second question to be considered if the disposition of the security is a trade

under the Securities Act is, Is the trade a distribution within the meaning of the

Securities Act? This generally means, is the disposition a sale or other disposition

for valuable consideration—

• from the treasury of the issuer of the securities (in other words, a primary trade); or

• from the holdings of a control person, promoter, incorporator, organizer, or underwriter of the issuer of the security (most are terms defined in the Securities Act) or from the holdings of persons or companies who acquired their securities under a statutory prospectus waiver or exemption in the Securities Act (see discussion of statutory prospectus waivers or exemptions below), in other words certain types of secondary trades.

A distribution does not include a disposition of a security by a person or company

that acquired the security in an offering where the person or company received a

prospectus under the Securities Act when they acquired the security as long the

person or company is not a control person, promoter, incorporator, organizer, or

underwriter of the issuer of the security.

If the disposition is a distribution, the person or company selling the security, whe-

ther it be a primary trade or the type of secondary trade discussed above, must:

• prepare and provide the purchaser of the security with a prospectus approved under the Securities Act to do the trade;

• find a statutory prospectus waiver or exemption in the Securities Act from the requirement to prepare and provide the purchaser of the security with a prospectus approved under the Securities Act to do the trade; or

• apply for and obtain from the SSC a discretionary prospectus waiver or exemption from the requirement to prepare and provide the purchaser of the security with a prospectus approved under the Securities Act to do the trade.



An additional matter to be considered when working with the Securities Act is that

the use of a statutory prospectus waiver or exemption in the Act to sell a security

triggers resale restrictions with respect to that security under the Act. Resale re-

strictions are restrictions on the purchasers of the security’s ability to resell the

security. These resale restrictions (sometimes referred to as hold periods) are

generally indefinite unless the purchaser can find a statutory prospectus waiver

or exemption in the Securities Act to sell the security, or the issuer of the security

is or becomes a reporting issuer within the meaning of the Act (usually by filing a

prospectus under the Securities Act). Resale restrictions are also usually imposed by

the SSC in any discretionary prospectus waiver or exemption granted by the SSC with

respect to an offering of securities. Resale restrictions under the Securities Act are

not triggered by trades of securities under the New Gen Act.

For more information on the workings of the Securities Act, the waivers or exemp-

tions, and the resale restrictions discussed above, consult “How to Raise Capital

Using Exemptions,” prepared by the SSC. This paper is available online at

www.ssc.gov.sk.ca or by calling the SSC at (306) 787–5299.

The New Generation Co-operative Act works differently from the Securities Act.

The New Gen Act does not contain registration or prospectus requirements similar to

those discussed above under the Securities Act. Nor does it contain resale restrictions

(although, as noted earlier, the resale of securities of an NGC—that is, a secondary

trade of securities of an NGC—is subject to the Securities Act).

As noted in the Primary Trade Paper, the New Gen Act provides that, with respect

to a primary trade of securities of an NGC, the Securities Act does not apply unless

the NGC chooses that it should apply, or the CSB directs that it should apply. If the

Securities Act does not apply (if it did apply, the requirements discussed above

would be triggered), an NGC must file with the CSB the information the CSB requires

with respect to the primary trade and receive the approval of the CSB to do the trade.

This is unless the NGC can fit itself within one of the waivers or exemptions from



these requirements in the New Gen Act or the regulations to that statute or has ob-

tained a discretionary waiver or exemption from these requirements from the CSB.

If the approval of the CSB is required, the approval may contain such terms and

conditions as the CSB feels are suitable, a common one being that the NGC prepare

and provide to the purchaser of the security a prospectus similar to that which would

be required under the Securities Act. To date, it has been rare for the CSB to grant a

discretionary waiver or exemption from the requirements of the New Gen Act.

For more discussion of the workings of the New Generation Co-operatives Act with

respect to a primary trade of securities of an NGC, consult the Primary Trade Paper.

The Secondary Trade

As noted above and in the Primary Trade Paper, a holder of securities of an NGC

could have obtained their securities by one of the following methods:

• Method 1—by way of a prospectus offering under the Securities Act; • Method 2—by way of an offering approved by the CSB, which approval has

to date often included the requirement to use a prospectus similar to that which would be required under the Securities Act;

• Method 3—by way of statutory registration and prospectus waivers or exemptions contained in the Securities Act;

• Method 4—by way of statutory waivers or exemptions contained in the New Gen Act;

• Method 5—by way of a discretionary waiver or exemption applied for and granted by the SSC; or

• Method 6—by way of a discretionary waiver or exemption applied for and granted by the CSB, which, to date, have been rarely granted.

Regardless of the method by which the securities were acquired, the Securities Act applies to the secondary trade of the securities, although how the Act applies varies

somewhat depending on the method used to acquire the securities. In considering the

application of the Securities Act to a disposition of securities of an NGC, consider the

two questions discussed above.



Registration (Is the Disposition a Trade?)

Assuming the disposition is a sale or other disposition for valuable consideration,

as opposed to a gift, which is not trade, it is a trade under the Securities Act no

matter which method was used to acquire the security. As a trade, unless you are

registered to sell securities, can find a statutory registration waiver or exemption in

the Securities Act to sell the security, or have obtained a discretionary waiver or

exemption from the SSC to sell the security, you cannot sell the security. You must

continue to hold it.

For a discussion of statutory and discretionary waivers or exemptions please consult

“How to Raise Capital Using Exemptions,” prepared by the SSC. This paper is avail-

able online at www.ssc.gov.sk.ca or by calling the SSC at (306) 787–5299.

A statutory registration waiver or exemption in the Securities Act that might be

helpful in some circumstances would be the isolated trade statutory registration

waiver or exemption (the corresponding isolated trade statutory prospectus waiver

or exemption differs from the statutory registration waiver or exemption and will

be less helpful in the context of a prospectus).

There is also a statutory registration waiver or exemption in the Securities Act that

allows for trades through a registrant under the Act. This may not be useful in the

initial stages of development of an NGC, but should an NGC grow to a size where a

registered dealer under the Securities Act runs an over-the-counter market for the

securities of the NGC, or the securities of the NGC are listed on an exchange like the

CDNX, this may provide a method for a holder of the securities of the NGC to sell

them. This is not discussed in the above paper, but the provision can be found in

clause 39(1)(j) of the Securities Act. In such cases, the holders of the securities would

be holding freely tradable securities.



Prospectus (Is the Disposition a Distribution?)

Assuming the disposition is a trade, the next question is, Is the trade a distribution?

If it is, then the sale of the securities of an NGC will be subject to resale restrictions

under the Securities Act. Only the use of a statutory prospectus waiver or exemption

in the Act to trade securities will trigger resale restriction under the Act on those

securities in the hands of the purchaser of those securities. Whether the sale is a

distribution depends on the method under which the securities were acquired.

Should you find that your sale would not be a distribution under the Securities Act,

you are holding freely tradable securities in the prospectus context, although you

still need to consider the registration requirements discussed above.

Method 1—If you acquired the securities under this method, unless you are a control

person, promoter, incorporator, organizer, or underwriter of the issuer of the

security, the disposition will not be a distribution, and the securities you hold are

freely tradable.

Method 2—If you acquired the securities under this method, unless you are a control

person, promoter, incorporator, organizer, or underwriter of the issuer of the

security, the disposition will not be a distribution, and the securities you hold are

freely tradable.

Method 3—If you acquired the securities under this method the securities you hold

are subject to the resale restrictions set out in the Securities Act. Consult “How to

Raise Capital Using Exemptions,” available online at www.ssc.gov.sk.ca or by

calling the SSC at (306) 787–5299. You may be subject to additional requirements if

you are a control person, promoter, incorporator, organizer, or underwriter of the

issuer of the security.

Method 4—If you acquired the securities under this method, unless you are a

control person, promoter, incorporator, organizer, or underwriter of the issuer



of the security, the disposition will not be a distribution, and the securities you hold

are freely tradable.

Method 5—If you acquired the securities under this method, the securities you hold

are subject to whatever resale restrictions the SSC imposed on you in the waiver or

exemption it granted with respect to the trade of the securities to you. You may be

subject to additional requirements if you are a control person, promoter, incorpor-

ator, organizer, or underwriter of the issuer of the security.

Method 6—If you acquired the securities under this method, the securities you hold

are subject to whatever resale restrictions the CSB imposed on you in the waiver or

exemption it granted with respect to the trade of the securities to you. You may be

subject to additional requirements if you are a control person, promoter, incorpor-

ator, organizer, or underwriter of the issuer of the security.

Trades of securities of an NGC by a control person, promoter, incorporator,

organizer, or underwriter of the NGC will always be a distribution under the

Securities Act.

In addition to the application of the Securities Act, you should always consider:

• the New Gen Act, which may contain provisions that affect a sale of the securities of an NGC; and

• the articles and by-laws of the NGC, which may contain additional restrictions on the sale of the securities of an NGC.

The Market-Making Mechanism

It may be that an NGC has grown to a size where it has a large number of freely

tradable securities outstanding held by a large number of security holders, but there

is no registered dealer under the Securities Act running an over-the-counter market

for the securities of the NGC, and the securities of the NGC are not listed on an



exchange like the CDNX. In this situation, an NGC may consider running its own

market-making mechanism to provide liquidity to its security holders.

The market-making mechanism is a means whereby an NGC can create a secondary

market for its securities. It does not provide a way for holders of its securities to

avoid the resale restrictions discussed above; it just provides them with a place to

go to find someone to buy them.

An issuer usually conducts a market-making mechanism by:

• constructing and regularly maintaining a list of all persons who would like to buy or sell the securities of the issuer;

• ensuring that all persons have an equal opportunity to put their name on the list as a buyer or a seller;

• ensuring that the list is publicly available; • ensuring that the same corporate and financial information about the issuer is

equally available to all persons on the list so that everyone involved in the process is on a level playing field;

• ensuring that historical sale prices for its securities are equally available to all persons on the list, to ensure transparency in the process;

• providing no investment advice to those involved in the process; • not soliciting any person’s involvement in the process; • only carrying out activities of a purely administrative nature in the process; and • since the process is a service to its security holders, charging no fee for

participation in the process.

Under the Securities Act, this activity by an issuer of securities requires the issuer to

become registered under the Act to carry it out or obtain from the SSC a discretionary

waiver or exemption of the registration requirement in the Act. A number of issuers

have obtained such a waiver or exemption, and the SSC instituted General Ruling/

Order 45–903 for Community Bond Corporations to carry out this activity. The SSC

will shortly institute a General Ruling/Order to allow all issuers to carry out these

activities.



Because the New Generation Co-operatives Act provides that the Securities Act does

not apply to trades by an NGC of its own securities, these activities by an NGC, as

long as it deals only with its own securities and does not provide any investment

advice (which is a registerable activity under the Securities Act not exempted under

the New Gen Act), are not subject to the Securities Act, and no registration or discre-

tionary waiver or exemption from the registration requirement in the Act is needed

from the SSC.

Although it may not be clear, it appears by the wording of the New Gen Act that the

approval of the CSB or a discretionary waiver of exemption from the CSB would be

necessary for an NGC to carry out these activities, unless the NGC chooses or the CSB

directs that the trades be subject to the Securities Act. Once the SSC has its General

Ruling/Order in place for these activities for all issuers (which will occur shortly),

this may be a reasonable course of action. As far as the writer is aware, the CSB has

not yet considered this issue.



A N o t e o n t h e S t r a t e g i c A l l i a n c e s

C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s U n i v e r s i t y o f S a s k a t c h e w a n

hen a producer group is thinking about forming a New

Generation Co-operative (NGC), they may encounter several

problems. One problem is that a producer group often lacks sufficient resources to

form a successful value-added processing facility on its own. A second problem is

lack of expertise, such as processing or marketing, which are necessary for value-

added activities.

The purpose of this article is to discuss the ways in which a producer group can

address the problems of lack of capital and lack of expertise. The first section

discusses two ways that an NGC can access outside capital. The second section

suggests how a strategic alliance may alleviate the lack of expertise as well as

capital.

Outside Investment

One way for an NGC to address the issue of access to capital is by inviting outside

investment. This can happen through the sale of preferred shares or by investment

directly at the producer level.

W

C e n t r e P e r s o n n e l


Preferred Shares The Saskatchewan New Generation Co-operatives Act allows nonmembers to pur-

chase preferred shares in an NGC. The investment in preferred shares and investment

by members in equity shares represents the total equity in an NGC (described in

Figure 1). Preferred shares may be issued to members or nonmembers. An NGC may

offer several classes of preferred shares, all of which carry no par value. The

formula for determining the value of no-par value shares is described in the

organization’s Articles of Incorporation.

NGC

Figure 1: An NGC with Investment by Preferred Shareholders

Holders of preferred shares may be entitled to elect up to 20 percent of the NGC

directors. If the class of preferred shares has voting rights then any one shareholder

can hold up to 10 percent of the total preferred shares. This may be a problem if

members are unwilling to forgo some control to nonmembers. It is possible to

structure a class of preferred shares with no voting rights. If the class of preferred

shares does not have voting rights, then any one shareholder can hold up to 25

percent of the total preferred shares. However, this also causes a problem—would

people be willing to invest without control?

A second challenge with preferred shares is determining the rate of return. The rate

of return can be fixed or it can be tied to the profitability of the co-op. If the rate of

return is fixed, then the preferred shareholders have no incentive to influence the

Members

Preferred Shares (Outside Investment at the Co-op)

Level)

Member Investment



business of the co-op. This may be good if the co-op management is successful and

does not need to be monitored. However, if management is poor, then the co-op may

benefit from pressure by preferred shareholders to improve performance. Moreover,

investors may not want to invest if the fixed rate of return is too low.

If the rate of return is tied to the profitability of the co-op (a fluctuating rate of

return), then preferred shareholders have an incentive to encourage the co-op to

maximize its profits and therefore maximize the return to preferred shareholders.

While members can benefit from the co-op’s profitability (through patronage divi-

dends), the benefit may come at their own expense, at times, if the co-op raises

profits by offering a lower product price.

This tension between the goals of the shareholders and the producers can be a signif-

icant problem in situations where preferred shareholders earn a return based on pro-

fitability. This can lead to demands by the preferred shareholders for greater control

and transformation of the co-op to an investor-owned and -controlled firm.

Investment at the Producer Level A second way to access outside capital is for investment to occur at the producer

level. The nature of the agreement between a member and an investor would be

determined by the two parties, independent of the co-op and other members. The

advantage of this arrangement is that the interests of the investor and the member

are aligned—if the member is profitable, the investor also benefits. Investing at the

producer level is a way of bringing in capital without creating the tension outlined

above. Figure 2 (next page) illustrates this type of arrangement.

Strategic Alliances

Producers tend to be experts in production, but they may lack the expertise to pro-

cess and market their product. One way an NGC can access necessary resources is by

forming a strategic alliance with a partner firm or firms. A strategic alliance is an

association between people or organizations that provides mutual benefits to both



parties. The benefits of a strategic alliance may include access to capital, excess

processing capacity, processing expertise, or access to existing markets.

Figure 2: Outside Investment at the Producer Level

Before forming a strategic alliance, it is desirable for producers to organize as an

NGC. Collectively, as an NGC, producers have more bargaining power in the alliance

than they would individually. It is also desirable for the partner firm that the pro-

ducer group forms an NGC. An alliance with an NGC eliminates the processor’s need

for individual contracts with each producer. The delivery contract is built into the

NGC’s By-Laws of Incorporation. By-laws are not easily renegotiated. This means

that the delivery contracts with producers in an NGC are more enforceable than in-

dividual delivery contracts would be. Aligning with an NGC group, therefore, would

mean that the processor is more likely to receive the quantity and quality of product

agreed to.

There are a variety of ways an NGC might structure a strategic alliance. One way is

for an NGC to invest in an existing business. A second way is for an NGC to partner

with another firm or firms to form a new business entity.

NGC

Members

Member A Member B Investor A (Outside Investment at Producer Level)

Investor B (Outside Investment at Producer Level)



NGC Investment in an Existing Processor It may be desirable for an NGC to partner with an existing processor or other type of

business. This type of arrangement enables the NGC to process its product and the

processor to fill excess processing capacity and/or to access capital. This type of

arrangement is illustrated in Figure 3.

Existing Company

Figure 3: Alliance between NGC Producer Group and an Existing Company

The number of shares owned by the NGC may reflect the processor’s excess pro-

cessing capacity. One example of this type of strategic alliance is the relationship

between US Premium Beef and Farmland National Beef Packing Company.

Example: US Premium Beef and Farmland National Beef Packing Company

Farmland National Beef Packing Company is the fourth largest processor of

beef in the United States, and is a subsidiary of Farmland Industries. US Premium

Beef (USPB) is a co-operative representing producers in all segments of the beef

industry.

USBP and Farmland National Beef Packing Company formed an alliance in 1997,

when USBP purchased an undisclosed number of shares in Farmland National Beef

Shares Owned by Partner Firm

Shares Owned by the NGC

NGC

Members



Packing Company. USPB formed the alliance to avoid the high costs of building a

new plant. USPB wanted to have equity ownership interest and equal control with its

partner. This would allow USPB to develop its own ideas while protecting its share-

holders’ interests.

Farmland National Beef Packing Company was one of several processors eager to

form an alliance with USPB, which could fill the packer’s excess processing capacity

and offer an assured supply of high quality beef.

New Business Entity A second way of constructing a strategic alliance is to form a new business entity,

such as a corporation. An NGC may partner with a firm or firms that offer such

things as financial support, marketing or manufacturing expertise, or established

markets. Figure 4 illustrates a new corporation formed from an alliance between an

NGC, a processing firm, and a marketing firm. As a corporation, the profits generated

by the new business entity would be allocated to the NGC and the partner firms in

proportion to investment. Trilogy Ltd. is one example of this type of alliance.

New Corporation

Figure 4: Alliance between NGC Producer Group and Expertise Groups

Example: Trilogy Ltd.

NGC Group Processing Firm Marketing Firm

Members

Number of Shares Owned

by the NGC


by the Marketing Firm


by the Processing Firm



Trilogy Ltd. is a Manitoba-based company that is preparing to produce egg

products such as extended shelf-life liquid eggs, precooked egg patties, omelettes,

and egg substitutes for the Canadian market. This new organization is the result of

a strategic alliance between the Manitoba Egg Producers Co-op (an NGC), Michael

Foods, and Canadian Inovatech. Each firm invested one-third of the cost of

developing Trilogy.

The Manitoba Egg Producers Co-op Ltd. is an NGC owned by 115 egg producers in

Manitoba. The co-op offers a consistent supply of quality eggs to Trilogy. Canadian

Inovatech, Canada’s largest processor of egg products, will break the eggs at its

Winnipeg plant and process them in an adjacent plant. Michael Foods is a food

processor from Minnesota with access to established markets for processed egg

products.

Trilogy offers mutual benefits to each party. For the Manitoba Egg Producers,

partnership with Canadian Inovatech and Michael Foods creates a chance to share

the risks and benefits of processing and adding value to their product



A N o t e o n t h e M u l t i p l e - S t r i n g S t r u c t u r e

C e n t r e f o r t h e S t u d y o f C o - o p e r a t i v e s U n i v e r s i t y o f S a s k a t c h e w a n

raditionally, co-operatives have been formed by a relatively

homogeneous group of producers to meet a common set of needs.

With a homogeneous group of members, a co-op can provide relevant services and

clear benefits to its members. As the co-op matures, however, its membership often

becomes more heterogeneous and its members’ needs more diverse. The co-op may

diversify into a broad range of activities in an attempt to meet the needs of a hetero-

geneous membership.

On the other hand, co-ops that offer too broad a range of services often struggle to

make a clear link between the needs of members and the benefit of membership.

Profits from one activity may subsidize a less profitable activity. As a result, all

members will pay for a certain service that only a few will use. This leads to a sit-

uation where the benefits of membership in the co-op are unclear to its members.

If the co-op fails to provide clear benefits, members may have no reason to use the

co-op and commitment falls.

The purpose of this article is to explore how the application of the multiple-string or

umbrella structures can help co-ops avoid or mitigate the problem of cross-subsidi-

T



zation. In a multiple-string co-op, each product or service line represents one of a

number of multiple strings, or activities, within the co-op. The co-op may also offer

common or umbrella services—such as processing, transportation, or marketing—to

each product line. Each product or service line uses some combination of the co-op’s

services to meet its needs. One way to clarify the link between services and benefits

is to organize each product line as a New Generation Co-operative (NGC).

This paper describes four examples of multiple-string co-ops. The first is a case

in which a traditional co-operative evolved to employ an umbrella structure. The

second illustrates a case in which co-operatives were created anew using the um-

brella structure. The third example describes a proposed venture that would have

seen a traditional co-op evolve into a multiple-string structure composed of “finger”

NGCs. The final example is a hypothetical model that could be applied to emerging

NGCs.

Danish Crown

Danish Crown, the largest pork processing and slaughtering company in the Euro-

pean Union, is an example of a traditional co-op with a multiple-string structure.

This organization separates its pig slaughter into heavy pigs, UK pigs, and various

types of pigs for the Danish market.

Members of Danish Crown understand that there is a clear mechanism to account for

the revenues received from each type of pig. A member can expect to receive the

total benefits from the type of pig he or she delivers; there is no cross-subsidization

between different types of pigs. Danish Crown pays a premium based on the farm-

level costs of production. In some cases, the premium is a means of encouraging

producers to move from one type of pig production to another. For example, Danish

Crown offers a premium or subsidy to farmers who convert to raising organic pigs.

CUMA Co-operatives

The Coopérative d’Utilisation de Materiel Agricole (CUMA) Co-op is a type of farm



machinery co-op being adopted in Québec. CUMAs enable producers to buy and

maintain farm machinery co-operatively. The CUMA owns the equipment and rents

it to members at the lowest possible cost.

A CUMA is composed of activity branches that correspond to individual pieces of

farm machinery. A member can join one or more branches; the costs associated with

one branch are separate from all other costs. Therefore, a member of one activity

branch knows that the cost she or he pays entirely supports that piece of machinery.

Figure 1 outlines a CUMA that offers spraying, seeding, and raking services. Member

1 belongs to each of the NGCs, Member 2 belongs to two, and the rest of the mem-

bers each belong to one activity.

CUMA

Sprayer Seeder Rake

Member 1 Member 1 Member 1



Figure 1: A CUMA Co-operative



United Country Brands

United Country Brands was to be the outcome of a proposed merger between two

large, farmer-owned co-operatives—Cenex Harvest States and Farmland Industries.

United Country Brands was going to be an umbrella co-op for eleven to fifteen

individual organizations, or “fingers.” It was proposed that each finger would be a

New Generation Co-op. Members could choose to invest and do business with one

or more finger NGCs. In each finger NGC, members would invest an amount propor-

tional to their intended use. By organizing the fingers as NGCs, the co-op would have

relied on member equity for financing.

A Model for Emerging Co-ops

The multiple-string structure may be useful for a group of producers who share a

number of common needs. Emerging co-ops represent one situation in which a large

number of producers may have common needs.

Figure 2 (next page) outlines a hypothetical example of a multiple-string fruit and

vegetable co-op composed of three finger NGCs. The co-op markets three crops: can-

taloupe, cabbage, and carrots. It offers marketing, transportation, processing, and

cleaning services to all product groups. However, each product group has unique

needs in terms of transportation, processing, and cleaning services. Cantaloupes

require transportation; cabbages require cleaning, processing, and transportation;

and carrots require cleaning and transportation.

Producers become members of one or more product groups according to the type of

production in which they are engaged. As NGCs, each producer group requires its

members to invest in the co-op in proportion to the amount of product they deliver.

Multiple-String Fruit and Vegetable Co-op



Figure 2: A Multiple-String Field Fruit and Vegetable Co-op

The costs associated with services for each group are allocated exactly to that group.

In this way, each member of a product group knows that she or he is paying only for

the services that are used for that particular product. No member is concerned that

she or he is paying for services rendered to another group. A member of the canta-

loupe group, for example, knows that the price she or he pays for transportation

services is not higher or lower due to cross-subsidization among the producer

groups.

This example of a multiple-string structure shows how a co-op can offer a range of

services to groups with both different and common needs. At the same time, the NGC

producer groups allow the co-op to provide clear benefits to its members.

Cantaloupe Group

Transportation Processing Cleaning

Carrot Group Cabbage Group

Marketing Services



M a r k e t i n g C o n t r a c t s T h e S u p p l y C o n t r a c t s b e t w e e n M e m b e r s a n d t h e C o - o p e r a t i v e

J a m e s H . G i l l i s S t e v e n s o n , G i l l i s , H j e l t e , a n d T a n g j e r d

Introduction

he economic power of the New Generation Co-operative is its

ability to provide value-added processing and marketing to the

commodities supplied by its members, and to direct the financial benefit of these

activities back to the members. In some cases, the members’ products will be

differentiated (or specialized) in some way from similar commodities sold on the

open market, giving them a higher raw value when used in the co-operative’s

finished product than they would have in any other use. In other cases, the value

added by the co-operative is a result of the technology possessed by the co-op or the

skills and knowledge applied by the members. The patronage dividends from the co-

operative’s value-added activity, combined with the enhanced price reflecting the

commodity’s specialized value (where applicable), provide the members the return

needed for their investment in setting up the co-operative and (where applicable)

specializing their commodities.

The two legal relationships with the co-operative of economic value to its members

are (1) their memberships, and (2) their marketing contracts with the co-operative.

T

J a m e s G i l l i s


The co-operative can function only if its members commit to providing it with a

reliable supply of the commodity sufficient to meet its quality, quantity, and timing

requirements. The marketing contract is the legal tool that secures this commitment.

The main difference between the marketing contract and a regular contract is that

since the marketing contract comes automatically with membership in the co-

operative, each party has a built-in interest in the success of the other. While the

marketing contract deals primarily with the arm’s length part of the relationship, it

has features that one would not expect to see in a contract with an unrelated third

party. For example, some marketing contracts will contain terms allowing the co-

operative to unilaterally change certain terms from time to time to give it the flex-

ibility it needs. Members are expected, within reason, to accept and work with these

changes for the good of the organization. The degree of give and take required in

some marketing contracts could not operate effectively in contracts where the parties

function strictly at arm’s length.

The purpose of this paper is to give some guidance to organizers of New Generation

Co-operatives in designing their marketing contracts. As the business of every co-

operative (and the way it does its business) is unique, there is no one format that will

fit all co-operatives. This paper will identify the things that need to be covered in the

marketing contract, and will show by example how particular issues affecting the

business of a co-operative can be addressed.

Marketing Contracts—How Big? How Many? How Often?

In developing a general format for the marketing contract, the author has tried to

combine the principle that simpler is better with the idea that the marketing contract

should be a thorough, meaningful working document for guidance and clarification.

Some of the terms of the contract will be unique to each member, while others will

be the same for all. Some will remain constant over time, while others will change

periodically. Of the changeable terms, some will be reviewed on an annual or cyc-

M a r k e t i n g C o n t r a c t s


lical basis, while others will change on an irregular basis. The draft format attempts

to minimize the number and frequency of contract documents, allowing as far as

possible for a single document to cover years of dealings between the member and

the co-operative, accommodating numerous transactions occurring under a variety of

terms and conditions. Where periodic changes or fresh arrangements need to be

documented, there has been an attempt to keep the amending document short and

simple, while preserving its legally binding effect.

With these features in mind, the author has devised the following three documents,

which are intended to work together to cover all the contractual aspects of the

purchase/supply relationship between the member and the co-operative:

• The Marketing Agreement is a standard-form document that the co-operative

enters with every member. It will be the same for everyone, and is not intended

to change over time. It contains all the general rights and obligations of each

side, and governs how the other two documents below operate in the overall

context of the contract.

• The Quality Standards and Management Practices Schedule (Appendix A to

the Marketing Agreement) is also a standard form applying to all members, but

created with the intent that it will be modified from time to time to reflect better

practices, new standards, technological innovations, or other changes required

by the co-operative to sustain its competitive position. The Marketing

Agreement will stipulate that the co-operative can “reasonably and in good

faith” change the terms of the Schedule as may be required from time to time,

and that the members agree in advance to such changes being made.

• The Delivery Notice is the document issued by the co-operative to individual

members. Each one contains information specific to the member to whom it is

directed, specifying the prices, quantities, and delivery schedule for that member

for the production period covered in the Notice. The Notice will establish a spe-

cific contract between member and co-operative for that production period, with



the detail as stated in the Notice and the general terms as stated in the Marketing

Agreement, as modified in the Schedule.

The author has resisted the temptation to provide a fill-in-the-blanks-model market-

ing contract, and has chosen instead a fictitious sample, so that the reader can better

see how to address the issues that must be dealt with in any real-life situation.

Please note that the sample is in no way intended to recommend any business content,

or to reflect any technical or commercial realities of such an operation, but merely to

show a workable format in which those things can be addressed in the contract

documents.

Real-life situations may be either more or less complex than the sample provided. In

some cases, other Schedules may also be included, such as, for example, the contract

between the co-operative and the purchaser of the finished product, which may con-

tain pricing or other terms that impact on the members’ contracts. If the commodity

being supplied by the members is generic, it may be unnecessary to include any

schedules or other stipulations as to methods or quality of production.

Readers should keep this note of caution in mind when reviewing the following

guide to the sample.

The Recitals

To provide a contextual understanding of the contractual relationship created in

the Marketing Agreement, it is important to say something of a general nature about

the type of activity that the co-operative will be undertaking, the roles of the parti-

cipants, and the overall objectives of the business venture. The sample gives an

example of how to do this.



Terminology

While it may seem overly legalistic to begin an agreement with definitions, it

is useful to define key concepts in order to maintain precision and consistency

throughout the document. The idea of “Delivery Obligations,” for example, is

central to the sample contract because of the co-operative’s need to be able to

enforce them. The enforcement provision in Section 13.1 is clear and straight-

forward because the defined term is used there and in every other relevant part

of the document.

The drafters of any real-life contract should identify the ideas that are key to their

business relationships, develop careful and complete descriptions of these ideas, and

have them appear first in the contract as definitions, with the defined terms then

used in every other place in the document where they need to be addressed. Some

of the defined terms in the sample, such as “Quota,” will be useful in most real-life

situations, while others in the sample may not. As a rule, a term should not be de-

fined unless it encompasses a fairly specific idea and will be used at least twice in

the body of the document.

Drafters should consider introducing the idea and definition of “Rules” into their

contracts, as the sample does. This allows the co-operative some flexibility to

control the quality of the product it receives from its members.

Using the Delivery Notice as a feature and defined term of the Marketing Contract

is also recommended. This allows the co-operative to create future legally binding

delivery obligations without the need of entering into further agreements with the

member. The recommended form of Delivery Notice provides for signature and

return by the member, but this is for acknowledgment purposes only. The delivery

obligation exists whether or not the member signs or accepts it.



Obligations of the Member and the Co-operative

The details of such obligations will be specific to the co-operative’s business. The

key things to be included for the member, however, are:

• a clear and specific statement of his/her delivery obligations (see 2.1 of the

sample); and

• warranties as to quality, tying these to the Rules and Delivery Notices if these

are used (see 2.3 of the sample).

The key things to be included for the co-operative are statements of its obligation:

• to adequately perform the service it undertakes for its members (see 3.1, 3.2, 3.4,

and 3.5 of the sample);

• to accommodate all members fairly in their deliveries (see 3.3 of the sample);

and

• to pay the members for their deliveries in a well-defined way (see 3.6 and 4 of

the sample).

Price and Payment

The method of calculating the payments due to the members, and the terms of

payment, should be specified (see 4 of the sample).

Duration and Termination Provisions

The provisions in the sample (Sections 5 and 6) are fairly common-sense and will

likely be directly usable in any real-life marketing contract. It is important to include

them, as failure to do so will leave scope for great difficulty in the event of a dispute

with a member.

Other Documents Being Part of the Agreement

It is particularly important in the co-operative/member relationship to ensure that the

mutual duties and responsibilities of both parties under the Articles and By-Laws are



also contractual duties owed to one another in their business dealings. A provision

such as 7.1 is thus recommended.

If Rules and Delivery Notices are features of the Marketing Contract, then terms

such as 7.2 and 7.3 are necessary to ensure that they remain contractually binding

over time.

Default and Remedies

The ideas behind these provisions are recommended for all co-operative situations.

Dispute Resolution

Sections 15 and 16 of the draft provide for arbitration, a form of ADR (alternate

dispute resolution), for day-to-day disputes that may arise between the co-operative

and a member. These will typically involve a member’s failure to deliver as re-

quired, or the co-op’s rejection of a delivery. Arbitration of these types of matters

will in most cases provide a faster and more inexpensive resolution than if they were

taken to court. If the drafters wish to provide for this method of ADR, they might

also consider identifying a bank of arbitrators acceptable to all members to create

confidence in the level of fairness and expertise that will be brought to bear if

disputes of this nature arise.

If the Marketing Contract includes a provision such as Section 15, then court will

not be an option for the kinds of disputes it covers. There will be some disputes,

however, where access to the courts is necessary. A co-operative needs the right to

get an injunction, for example, if a member is refusing to deliver. A member will

need court intervention if the co-operative is behaving in an unfair or oppressive

manner towards him/her on a matter other than day-to-day operation under the

contract (e.g., if the co-operative changes the Rules in a way that is unfair to the

member, or issues a Delivery Notice that places the member under a hardship not

experienced by others). The sample exempts matters of this nature from the

arbitration process (see Section 16).



General Terms

Please refer to the comments made above in relation to the Duration and

Termination Provisions.

Final Comment

While the sample may be useful as a guide, and while some parts of it may be

applied unchanged in a variety of situations, the drafters of each co-operative’s

marketing contract documents must carefully consider the nature of the business

it is in and the specific needs and concerns of its participants. They must be ready

and willing to customize these documents to meet those needs and concerns.

C o n t r a c t s b e t w e e n M e m b e r s a n d t h e C o - o p • • • 1

SAMPLE NGC MARKETING AGREEMENT

BETWEEN:

GRASSY MEADOW CATTLE FINISHING AND MARKETING CO-OPERATIVE LTD. (“the Co-operative”), a co-operative duly incorporated pursuant to the provisions of The New Generation Co-operatives Act of Saskatchewan (“the Act”)

AND:

___________________________________, (“The Member”), a member of the Co-operative

RECITALS The Co-operative is duly incorporated under the laws of the Province of Saskatchewan, and owns and operates a large scale feedlot (“the Feedlot”) in the R.M. of Dusty Plain No. 1234 in the Province of Saskatchewan. The Member owns or rents land, corrals, barns, and related equipment sufficient to enable the Member to raise feeder cattle to be finished by the Co-operative, with owner-ship thereof to be retained by the Member until such cattle are finished and sold on the Member’s behalf by the Co-operative. The Co-operative has the capacity to feed feeder cattle for its members, and has developed contacts and methods to market finished cattle for the benefit of its members. This Agreement, together with the Articles, By-Laws, any reasonable policies of the Co-operative, and any schedules or other documents incorporated by reference into this Agreement, establishes the legal relations between the member and the Co-operative. NOW THEREFORE IN CONSIDERATION of the mutual obligations undertaken in this Agreement, the Co-operative and the Member agree as follows: TERMINOLOGY 1. The words and phrases identified in this Section will have the meanings ascribed

to them as follows:

1.1. “Animal” means a cow, bull, or calf; 1.2. “Articles” means the Articles of Incorporation of the Co-operative,

as they may be duly amended from time to time;



1.3. “By-Laws” means the By-Laws of the Co-operative, as they may be duly amended from time to time;

1.4. “Delivery Notice” means a notice issued by the Co-operative to the

Member under the provisions of Section 7.3; 1.5. “Delivery Obligations” means the Member’s obligation to deliver cattle

to the Co-operative as specified in Section 2.1, and as otherwise provided in this Agreement;

1.6. “Fiscal Quarter” means a period of three months in a Production Year

commencing on April 1, July1, October 1, or January 1 in that Year; 1.7. “Production Year” means a period commencing April 1 of a given

calendar year and ending on the March 31 next following; 1.8. “Quota” means the number of Animals which the Member is required to

deliver to the Co-operative in a Production Year as determined by the number of Member Right Shares held by the Member within the meaning of Section 35 of the Act;

1.9. “Rules” means the provisions in the Quality Standards and Management

Practices Schedule annexed as Appendix “A” hereto, as the same may be amended from time to time as permitted in this Agreement;

1.10. “this Agreement” includes all the terms and conditions in this document,

the Articles, the By-Laws, the Rules, any Delivery Notice issued by the Co-operative, and any other document which may now or hereafter be incorporated by reference into the dealings between the parties hereunder;

and wherever a Section number is identified herein without any other identifying reference, that Section is contained in this document.

OBLIGATIONS OF THE MEMBER 2. Throughout the term of this Agreement the Member shall:

2.1. over the course of each Production Year deliver the Member’s Quota to the Feedlot, at his/her expense. The Member shall deliver all cattle in accordance with the schedule stipulated in the Delivery Notice for each Fiscal Quarter of that Production Year;

2.2. maintain such staffing, land, pasture, buildings, feed, veterinary services,

and equipment as are required to raise sufficient cattle to meet the Mem-ber’s Delivery Obligations on an ongoing basis;

S a m p l e N G C M a r k e t i n g C o n t r a c t


2.3. provide the following warranties to the Co-operative in relation to all

cattle delivered or to be delivered to the Co-operative under this Agreement:

2.3.1. that such cattle are of merchantable quality; 2.3.2. that the Member has used reasonable skill and judgment in

selecting suitable cattle to deliver to the Co-operative; 2.3.3. that such cattle conform to the quality standards set by the Co-

operative from time to time as set forth in the Rules or specified in the applicable Delivery Notice;

2.4. manage and care for the Member’s cattle, obtain necessary permits; main-

tain records relating to the Member’s operation; manage waste and meet environmental and health requirements on the Member’s facility; maintain insurance; and meet any other requirements as may be imposed in the Rules; and

2.5. permit representatives of the Co-operative to enter upon the lands com-

prising the Member’s facility to inspect the Member’s operation for the purpose of confirming that all terms, duties and obligations under this Agreement are being complied with.

OBLIGATIONS OF THE CO-OPERATIVE 3. Throughout the term of this Agreement the Co-operative shall:

3.1. maintain such staffing, land, pasture, buildings, feed, veterinary services,

and equipment as are required to custom feed and market cattle for its members;

3.2. use its best efforts to secure, maintain and increase the market for finished

cattle for the benefit of its members;

3.3. accommodate and accept the Member’s delivery of all cattle which the Member is required to deliver to the Co-operative under this Agreement, and which meet the warranties specified in Section 2.3, all in accordance with the delivery schedule stipulated in the current Delivery Notice. The delivery schedule in any Delivery Notice shall, insofar as possible, accom-modate reasonable ongoing availability of space at the Feedlot for cattle being delivered by all members, while allowing the Member to conduct his/her operation with the level of predictability and convenience



generally afforded to other members of the Co-operative under their Delivery Notices;

3.4. feed, maintain and finish all cattle delivered by the Member under Section

3.3;

3.5. use its best efforts to market and sell all cattle delivered by the Member under Section 3.3 at the most advantageous terms available at the time of prospective sale;

3.6. pay the Member for cattle sold by the Co-operative on the Member’s

behalf in accordance with the terms of Section 4. PRICE AND PAYMENT 4. The Co-operative shall pay the Member for each Animal delivered by the

Member, accepted by the Co-operative, and sold by the Co-operative on the Member’s behalf, in accordance with the following provisions:

4.1. The price payable by the Co-operative for the Animal shall be the price

actually obtained by the Co-operative for that Animal, less the Finishing Cost thereof as prescribed in Section 4.2. The price shall be paid by the Co-operative to the member no later than 5 business days after the Animal is sold by the Co-operative.

4.2. The Finishing Cost for each Animal shall be calculated by the Co-

operative by applying that fraction of the price received by the Co-operative for that Animal which covers the estimated average cost per Animal for all cattle finished by the Co-operative over the month in which that Animal is sold by the Co-operative, taking into account:

4.2.1. the cost of feed, labour, veterinary care, and other variable costs

incurred by the Co-operative on an ongoing basis in order to finish cattle;

4.2.2. the fixed costs, administrative costs, and other costs related to op-

eration of the Feedlot incurred by the Co-operative on an ongoing basis; and

4.2.3. the amount set from time to time by the Co-operative to cover

contingencies and to provide for patronage dividends to the members.

The Co-operative shall adjust the fraction to be applied in the foregoing calculation on or before the first day of each month by reference to its cost



experience in the preceding month and its assessment of prospective changes in its costs for the new month.

DURATION AND TERMINATION OF THIS AGREEMENT 5. This Agreement has an indefinite term, and shall continue until terminated as

provided in Section 6, or until cancelled as provided in Section 10 or 14. 6. This Agreement may be terminated in any of the following ways:

6.1. By the written consent of the Member and the Co-operative as an incident to the Member’s transfer of all of his/her Shares in accordance with the By-Laws, effective on the date the Member no longer owns the Shares;

6.2. By written notice from the Member, a his/her sole discretion and without

any reason being required, with such termination to be effective on the last day of the Production Year next following the Production Year in which in which such notice is given;

6.3. By election of the Member effective at the end of a Production Year in

which the Co-operative has voluntarily commenced bankruptcy proceed-ings or has become insolvent within the meaning of the Bankruptcy and Insolvency Act (Canada);

6.4. Upon termination of the Member’s membership in the Co-operative for

any reason permitted in the Articles or By-Laws, effective on the date agreed by the parties, or failing such agreement, on the last day of the Production Year in which termination of the Member’s membership occurs.

OTHER DOCUMENTS WHICH ARE PART OF THIS AGREEMENT 7. In addition to the terms set forth in this Agreement, the parties agree:

7.1. to be bound by the Articles and By-Laws of the Co-operative, and where any provision in either the Articles or By-Laws conflicts with a provision in this Agreement, the provision in the Articles or By-Laws shall prevail;

7.2. that the Rules are part of this Agreement, provided that if any Rule is

inconsistent with the Articles, the By-Laws, or the terms of this document, then the Articles, By-Laws, or terms of this document shall prevail. The Co-operative, so long as it acts reasonably and in good faith, may amend any portion of the Rules at any time, provided that the Co-operative shall wherever possible provide the Member with reasonable notice of its



intention to make such amendment. Subject only to Part XIX of the Act, and until action is taken by the Member thereunder, the Member is deemed to have agreed to be bound by any such amendment to the same extent as if the amendment was reflected in the Rules at the date of execution of this document;

7.3. to be bound by the terms and conditions contained in any Delivery

Notice issued by the Co-operative to the Member, provided that any such Delivery Notice shall be substantially in the form set out in Appendix “B” hereto, and shall not be inconsistent with the Rules or the terms of this document.

DEFAULT AND REMEDIES 8. Either of the following acts or omissions shall constitute default by the Co-

operative of its obligations under this Agreement:

8.1. Failure to accept any cattle delivered by the Member in accordance with his/her Delivery Notice, provided such cattle satisfy the warranties of the Member set forth in Section 2.3;

8.2. Failure to pay the Member as required in Section 4.

9. Upon breach by the Co-operative of any obligation referred to in Section 8, the

Member may sell any cattle thereby affected to any other person, and shall be entitled to receive from the Co-operative any difference between the price thereby obtained and the price which the Member would have obtained from the Co-operative if the breach had not been committed. The Member may not claim or recover any other incidental or consequential damages from the Co-operative.

10. Upon breach by the Co-operative of any obligation set forth in Section 3 other

than a breach referred to in Section 8, the Member may give notice to the Co-operative, specifying such failure and requiring the Co-operative to remedy the same within a reasonable time thereafter. If the Co-operative shall fail to remedy the same within such reasonable time, the Member may cancel this Agreement effective the last day of the Production Year in which such failure occurred. The Member may not at any time claim or receive any incidental or consequential damages from the Co-operative by reason of any breach to which this Section applies.

11. The Member shall not be entitled to withhold any future required delivery of

cattle by reason of any present or apprehended breach of this Agreement by the Co-operative.



12. Either of the following acts or omissions shall constitute default by the Member of his/her obligations under this Agreement:

12.1. Failure to make any delivery of cattle within the time or times required

in a Delivery Notice; 12.2. Failure of any Animal to satisfy any of the warranties specified in

Section 2.3. 13. The Member understands and agrees that the success of the Co-operative is de-

pendent upon his/her adherence to the terms and conditions of this Agreement, and in particular, compliance with his/her Delivery Obligations. The Member further understands that the Co-operative will suffer irreparable harm not ade-quately compensible in damages if the Member fails to meet his/her Delivery Obligations, and that, so long as the Member is capable of meeting such obli-gations, the balance of convenience will always favour the Member being required to meet such Delivery Obligations, leaving for later resolution any differences between the parties which led to the Member’s refusal to deliver. Accordingly the Member agrees that, if he/she fails or refuses at any time during the term of this Agreement to meet his/her Delivery Obligations to the Co-operative, the Co-operative shall be entitled, in addition to any other legal remedies it may have, to do any one or more of the following:

13.1. to obtain immediate interim injunctive relief from Court against the Mem-

ber restraining him/her from further breach of his/her Delivery Obligations, or requiring him/her to specifically perform such obligations;

13.2. to claim liquidated damages against the Member in the amount of $10 for

each Animal which the Member was required to deliver and which he/she failed to deliver, or which, when delivered, did not satisfy any one or more of the warranties specified in Section 2.3;

13.3. to deduct the amount of such liquidated damages from any other amount

then or thereafter owing from the Co-operative to the Member. 14. Upon the failure by the Member to meet any obligation set forth in Section 2

other than a breach referred to in Section 12, the Co-operative may give notice to the Member, specifying such failure and requiring the Member to remedy the same within a reasonable time thereafter. If the Member shall fail to remedy the same within such reasonable time, the Co-operative may cancel this Agreement effective the last day of the Production Year in which such failure to remedy occurred.

DISPUTE RESOLUTION



15. Subject to Section 16, all matters of difference between the parties in relation to this Agreement shall be referred to the arbitration of a single arbitrator, if the parties agree upon one, otherwise either party may apply to the Queen’s Bench Court of Saskatchewan for appointment of the arbitrator. The award and deter-mination of the arbitrator shall be binding upon the parties and their respective heirs, executors, administrators and assigns. Any arbitration under this Part shall be governed by the following:

15.1. Except where inconsistent with this Article, the provisions of The

Arbitration Act, 1992 of Saskatchewan applies to the resolution of all disputes to be resolved under this Part.

15.2. The parties specifically adopt the current Rules of Procedure For Com-

mercial Arbitration published from time to time by the Arbitration and Mediation Institute of Canada Inc. as the rules of procedure to govern any arbitration taken under this Agreement, and where any such rule of proce-dure conflicts with any provision of The Arbitration Act, 1992, the rule of procedure shall prevail.

16. Notwithstanding Section 15:

16.1. the Co-operative may apply to a Court of competent jurisdiction to obtain the injunctive relief specified in Section 13.1; and

16.2. the Member may apply to a Court of competent jurisdiction for any

remedy available to him/her in Part XIX of the Act relating to an act or omission of the Co-operative or any director, officer, employee or agent thereof other than a determination that the Member has failed to meet his/her Delivery Obligations, has breached a warranty given in Section 2.3, or has otherwise breached this Agreement.

GENERAL TERMS 17. The Co-operative shall have a lien on all cattle delivered to the Feedlot by the

Member for all costs incurred by the Co-operative to feed and finish such cattle. 18. Title to and risk of loss of all cattle delivered to the Feedlot shall remain with

the Member until such cattle are sold by the Co-operative on the Member’s behalf. In all of its duties and functions for the Member under this Agreement, the Co-operative acts solely as agent of the Member, with authority to feed, finish, market and sell the Member’s cattle, and to do all other things on behalf of the Member which are necessary to achieve the intent and purpose of this Agreement.

19. The Member may not assign this Agreement without the prior written consent of

the Co-operative.



20. This Agreement constitutes the entire agreement between the Co-operative and

the Member, and there are no oral or other conditions, promises, covenants, representations, or inducements in addition to, or at variance with, any of the terms of this Agreement.

21. No waiver of a breach of any of the provisions of this Agreement shall be

construed to be a waiver of any subsequent breach of the same or any other provision of this Agreement.

22. The language in all parts of this Agreement shall be construed as a whole and not

strictly for or against any party. In the event that any part of this Agreement is held to be invalid or void, the invalidity shall not affect any other part of this Agreement.

23. Subject to the other provisions of this Agreement, all of the terms and conditions

of this Agreement shall inure to the benefit of and shall bind the parties and their successors and permitted assigns.

24. The Co-operative reserves the right to unilaterally alter any provision of this

Agreement for which amendment is not otherwise specifically provided in this Agreement, provided that any alteration made under this Section shall be first ap-proved at any regular or special meeting of the Members of the Co-operative, at which a quorum is registered as being present or represented by mail vote, by a majority of members so preset or represented by mail vote, where the notice of such meeting contains a statement of the proposed alteration. A copy of such alteration shall be duly delivered to the Member in accordance with Section 26.

25. This Agreement shall be construed in accordance with the laws of the Province

of Saskatchewan. 26. Any Notice required or permitted in this Agreement may be given by regular

mail, facsimile transmission, or by Email transmission (where addresses or contact information is provided):

to the Co-operative at:

Box 123, Dusty Plain, SK S0L 9X0 fax: (306) 222–3344 Email: admin@grassymeadow_ngc.sk.ca

to the Member at:



DATED at Dusty Plain in the Province of Saskatchewan, this _____ day of __________________, A.D. 20__. GRASSY MEADOW CATTLE FINISHING AND MARKETING CO-OPERATIVE LTD. ____________________________________ President ____________________________________ Secretary DATED at Dusty Plain in the Province of Saskatchewan, this _____ day of __________________, A.D. 20__. ____________________________ ____________________________________ Witness Member’s name (please print) ____________________________________ Member’s signature


APPENDIX “A” Quality Standards and Management Practices Schedule

Feeding and Management Guidelines

To maximize production efficiency and to capture all the benefits of building design and

quality genetics, an all in-out production cycle is essential. This is necessary to break

disease cycles, allow time for cleanup and disinfection, and to optimize feeding manage-

ment. Though it is expected that a herd health and nutrition expertise will be engaged by

the Co-operative to provide strict guidelines for overall herd management, herd health,

and feeding, the following guidelines will represent a method of operation until such

times as other specific guidelines can be established.

General Management Practices

There must be no exposure to cattle owned by persons other than the Member for

biosecurity purposes.

Maintain strict personnel biosecurity for admittance to facilities. Rendering trucks

should never enter the premises.

Keep dogs, cats, and other domestic animals out of facilities.

Conduct a daily observation of all cattle on an individual basis for health problems, and

treat appropriate animals with proper medications.

Power wash and disinfect inside of facilities and feeders prior to admittance of each lot.

Record all cattle deaths and sickness on a report form provided by the Co-operative.

Maintain facilities and all equipment in proper functioning order.

Implement rodent- and fly-control procedures in and around facilities.

Mixing and regrouping of cattle should be avoided.



Emergency plans should be in place that include veterinary assistance, equipment

malfunction, and fire protection.

Cattle should be kept reasonably clean in comfortable, healthy surroundings.

Maintain accurate records concerning parentage, mortality, and morbidity of all cattle in

the Member’s cattle operation.

Manage, store, and dispose of wastes, and land-apply animal wastes as required by all

applicable laws and regulations and consistent with best management practices.

Maintain up-to-date animal waste management plans and records in compliance with all

applicable laws and regulations.

Dispose of all dead animals in accordance with applicable laws and regulations and

public-health laws, and consistent with best management practices.

Obtain and maintain all permits necessary in connection with the raising of cattle.

Take all reasonable measures to assure that no cattle owned by other persons are placed

on the property and facilities employed in the Member’s cattle operation, and that cattle

owned by other persons are not allowed to commingle with the Member’s cattle.

Insurance Requirements

The Member shall maintain at his/her expense a general liability insurance policy

providing a minimum of $500,000 single-limit bodily injury and replacement value

property damage coverage for the Member’s facility, and shall provide the Co-operative

with the current certificate evidencing such coverage. The Member recognizes and

accepts the risks and hazards inherent in any livestock venture, and shall be responsible

to obtain at his/her option and expense any disability, business interruption, or income

replacement insurance as the Member may wish to carry.

Breeding Requirements and Restrictions

None at this time

A p p e n d i x A


Weight and Quality Requirements and Restrictions

None at this time

Nutrient Specifications for Grow/Finish Diets

The following nutrient specifications are expected to be followed by Members feeding cattle for this project.

Nutrient 100 kg 200 kg 300 kg 400 kg

C. protein, % 19.0 18.5 17.0 16.0

Lysine, % 1.1 1.0 0.85 0.80

Met. & cyst., % 0.66 0.62 0.53 0.51

Threonine, % 0.72 0.65 0.55 0.53

Tryptophan, % 0.21 0.19 0.15 0.14

Calcium, % 0.75 0.70 0.60 0.50

Phosphorus, % 0.68 0.60 0.50 0.40

Animal Health

It is not anticipated that cattle in care of the Member will require routine animal health

treatments. Animals should be observed on a routine schedule and more frequently

during inclement weather. Animals should be examined for signs of health problems,

physical discomfort, or injury. Unexpected death or signs of illness should be reported

promptly to the Co-operative. Sick or injured animals must be promptly treated. Animals

suspected of having a contagious disease must be isolated. Sick animals should be

observed thoroughly at least twice daily and assisted with feeding and drinking, if

needed, and given veterinary care, as appropriate. It will be required to record all

treatment events on documents provided by the Co-operative. Medications must be

administered according to label directions. A local practising veterinarian can be called

for emergency purposes, but it is required that the Co-operative personnel be notified

before such action is taken.

Animals unable to walk or that are ill and will not recover must be humanely euthanized

on the farm and not transported to the feedlot. Where the likelihood of recovery is low,

despite the treatment, the animal should be euthanized. When the likelihood is high, the



animal should be removed to an area where competition for feed and water is lower and

the animal can be monitored and treated regularly.

If death occurs, necropsies will be ordered only by representatives of the Co-operative.

Dead animals must be removed from the pens immediately. Depending on the site and

local ordinances, they may be buried, composted, incinerated, or disposed of by a

commercial rendering service. For rendering pick-up, a screened pick-up site should be

constructed away from the buildings. Rendering trucks will not be allowed to enter the

Member’s facilities.

Medical supplies and needles should be disposed of properly after use.

Transporting Animals

During hot weather, transporting cattle during midday should be avoided. During cold

weather, trailers should be properly bedded.


APPENDIX “B” Delivery Notice

Date:______________________________________

Member:___________________________________

Annual Quota: ___________________ Animals

No. of Animals to be delivered under this Notice: ___________________________

Delivery Schedule

1. _________ Animals between _______________ and _________________



All deliveries are to be made to the Feedlot at the Member’s expense. All provisions of the

Member’s Marketing Contract apply to this Delivery Notice, and all deliveries made by the

Member under it.

Please acknowledge receipt of this Notice by signing, dating, and returning the attached copy

within one week of receipt.

GRASSY MEADOW CATTLE FINISHING AND MARKETING CO-OPERATIVE LTD.

Per:______________________________

I acknowledge receipt of this Notice: ________________________ _______________

Member’s Signature Date



C o n t a c t I n f o r m a t i o n f o r Q u e s t i o n s R e l a t e d t o N e w G e n e r a t i o n C o - o p e r a t i v e s

Centre for the Study of Co-operatives

University of Saskatchewan 101 Diefenbaker Place Saskatoon SK S7N 5B8 Telephone: (306) 966–8509 Facsimile: (306) 966–8517 Web Site: http://coop-studies.usask.ca

Saskatchewan Economic and Co-operative Development Regional Economic Development Services

1919 Saskatchewan Drive Regina SK S4P 3V7 Telephone: (306) 787–5787 Fascimile: (306) 787–2198 Website: http://www.gov.sk.ca/econdev

Saskatchewan Agriculture and Food

Industry Development Branch Room 329, 3085 Albert St. Regina SK S4S 0B1 Telephone: (306) 787–8523 Fascimile: (306) 787–0271 Website: http://www.agr.gov.sk.ca



P a r t i c i p a n t L i s t f o r t h e N G C E x p e r t s W o r k s h o p

Dan Anderson MacPherson, Leslie & Tyerman 1500–410–22nd Street East Saskatoon SK S7K 5T6 [email protected] Mel Annand University of Saskatchewan c/o Agricultural Economics Dept. [email protected] Gil Assie Meyers, Norris, Penny 366–3rd Avenue South Saskatoon SK S7K 1M5 [email protected] Morley Ayars Saskatoon Rural Service Centre 3735 Thatcher Avenue Saskatoon SK S7K 2H6 [email protected] Jim Babcock Agri-Food Equity Fund [email protected] Randy Baldwin Kelly Associates Box 667 Ile des Chenes MB R0A 0T0 [email protected]

Myles Bantle Bantle Engineering Research P.O. Box 7805, Stn. Main Saskatoon SK S7K 4R5 [email protected] John Beckton Beckton Agricultural Finance & Management Consulting Service 400–410–22nd Street East Saskatoon SK S7K 5T6 306–934–2727 Wayne Bernakevitch McDougall Gauley 701 Broadway Avenue Saskatoon SK S7N 1B3 [email protected] Bruce Carson KPMG 600–128–4th Avenue South Saskatoon SK S7K 1M8 [email protected] Cris de Clercy Centre for the Study of Co-operatives University of Saskatchewan [email protected]

P a r t i c i p a n t L i s t


Joe Dierker McDougall Gauley 701 Broadway Avenue Saskatoon SK S7N 1B3 [email protected] Chris Donald Robertson Stromberg 600–105–21st Street East Saskatoon SK S7K 0B3 Jim Engdahl Cascadia Ventures Inc. 601–201–21st Street East Saskatoon SK S7K 0B8 [email protected] Brett Fairbairn Centre for the Study of Co-operatives University of Saskatchewan [email protected] Sandy Flory Canadian Classic Wild Boar Co-op [email protected] Barry Frank Hergott Duval Stack & Partners 1200–410–22nd Street East Saskatoon SK S7K 5T6 [email protected] Keven Fruhstuk Sask. Economic & Co-op Development Regional Development/ Operations Co-ordinator Saskatoon Regional Office 306–933–5757 Murray Fulton Centre for the Study of Co-operatives University of Saskatchewan [email protected] Dave Gabruch Agri-Food Equity Fund [email protected] Clint Gienni Sask. Economic & Co-op Development

Jim Gillis Stevenson, Gillis, Hjelte & Tangjerd #710–119–4th Avenue South Saskatoon SK S7K 5X2 [email protected] Michael Grace KPMG 600–128 4th Avenue South Saskatoon SK S7K 1M8 [email protected] Paul Grant McKercher, McKercher & Whitmore 300–374–3rd Avenue South Saskatoon SK S7K 1M5 [email protected] Gil Griffith Sask. Economic & Co-op Development North Battleford Regional Office Regional Development Manager 306–446–7471 Barry Gunther Sask. Economic & Co-op Development Co-op Development, Regina 306–787–2753 Lou Hammond Ketilson University of Saskatchewan College of Commerce [email protected] Norm Halldorson KPMG 600–128–4th Avenue South Saskatoon SK S7K 1M8 [email protected] Roger Herman Centre for the Study of Co-operatives University of Saskatchewan [email protected] Mary Ellen Hodgins Hodgins & Company 105–111 Research Drive Saskatoon SK S7N 3R2 [email protected]



Van Isman Sask. Economic & Co-op Development Executive Director, Regional Economic Development Services 306–787–2201 Bev Johnson KPMG 600–128–4th Avenue South Saskatoon SK S7K 1M8 [email protected] Clare Johnson Johnson and Porter Box 1180 Weyburn SK S4H 2L5 [email protected] John Keeler Sask. Economic & Co-op Development Business Services Improvement Branch 306–787–1674 [email protected] Gayle Kelly Corbett and Company 10056–101A Avenue Edmonton AB T5J 0C8 [email protected] Slawko Kindrachuk Canadian Shield Wild Boar Co-op [email protected] Rick Koller Koller Agri-Food Development Ltd. 106–204–3120 8th Street East Saskatoon SK S7H 0W2 [email protected] Jolene Kotzer-Mitschke Sask. Economic & Co-op Development Co-op Development, Yorkton 306–787–1473 Brian Lloyd Sask. Economic & Co-op Development Co-op Development, Prince Albert 306–637–4505

Linda Mack Sask. Economic & Co-op Development Co-op Development, Estevan 306–637–4505 Lorna MacMillan Saskatchewan AgriVision Corporation 502–45th Street West, 2nd Floor Saskatoon SK [email protected] Bill Martin University of Saskatchewan Dept. of Agricultural Economics [email protected] Don Maurer Manitoba Industry Trade & Mines Co-operative Development Consultant [email protected] Samuel McCoullough P.O. Box 278, #7 Birch Place Outlook SK S0L 2N0 [email protected] Dion McGrath Sask. Economic & Co-op Development 8th Floor, 1919 Saskatchewan Drive Regina SK S4P 3V7 [email protected] Ian McIntosh Saskatchewan Securities Commission 800–1920 Broad Street Regina SK S4P 3V7 [email protected] Heather McNeill Centre for the Study of Co-operatives University of Saskatchewan [email protected] Dale Mitchell Sask. Economic & Co-op Development Development Co-ordinator, Regina 306–787–7837



Barb Monette Sask. Economic & Co-op Development Saskatoon Regional Office Information Manager 306–933–5758 Dean Murrison Saskatchewan Securities Commission 800–1920 Broad Street Regina SK S4P 3V7 [email protected] Elizabeth M. Nash E.M. Nash Law Office 802 King Street Saskatoon SK S7K 0N7 [email protected] Dawn Odegard Sask. Economic & Co-op Development Development Co-ordinator, Swift Current 306–778–8904 Marve Painter University of Saskatchewan College of Commerce [email protected] Tom Porter B.C. Consulting Services 1007–1st Street East Saskatoon SK S7H 1T6 Brent Robertson March Consulting Accociates Inc. 200–201–21st Street East Saskatoon SK S7K 0B8 [email protected] Tony Romeo Manitoba Industry Trade & Mines Manager, Small Business and Co-operative Development Branch 204–984–2272 /1–800–665–2019 Dennis Rutten Cochrane Engineering 210–15 Innovation Blvd. Saskatoon SK S7N 2X8 [email protected]

Brian Scherman Balfour Moss 600–123–2nd Avenue South Saskatoon SK S7K 7E6 [email protected] Carol Shepstone Centre for the Study of Co-operatives University of Saskatchewan [email protected] Jason Skotheim Sask. Agri-Food Extension Research Unit Co-ordinator, Agribusiness Development Saskatoon SK 306–933–5569 Bill Spring Sask. Economic & Co-op Development Development Manager Regina SK 306–787–1605 [email protected] Brian Taylor Deloitte & Touche 400–122–1st Avenue South Saskatoon SK S7K 7E5 [email protected] Wayne Thrasher Sask. Economic & Co-op Development 2nd Floor, 1919 Saskatchewan Drive Regina SK S4P 3V7 [email protected] Stephanie Tynan McDougall Gauley 701 Broadway Avenue Saskatoon SK S7N 1B3 [email protected] Elain Unrau Sask. Economic & Co-op Development Saskatoon Regional Office Information Officer 306–933–5749



Raymond Van De Woestyne VCM Contractors & Engineers Ltd. 110–2103 Airport Drive Saskatoon SK S7L 6W2 [email protected] C.M. (Red) Williams, President Saskatchewan AgriVision Corporation Inc. [email protected] Jane Wootten Sask. Economic & Co-op Development 8th Floor, 1919 Saskatchewan Drive Regina SK S4P 3V7 [email protected] Ken Ziegler MacDermid LaMarsh 905–201–2lst Street East Saskatoon SK S7K 0B8 [email protected]

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